Labour market begins to loosen

The jump in the unemployment rate in September is evidence that the labour market has entered a loosening phase. The Bank of Japan reiterated that the output gap was its key gauge of price pressures in the economy at its meeting last week. Extra slack in the labour market would drive the indicator lower and increase pressure on the Bank to ease. We expect soft external demand and weak domestic demand following the sales tax hike to curb firms’ demand for workers and cause the unemployment rate to rise from 2.4% now to 2.7% by the end of next year. That’s still only a modest rise though. We think the output gap would have to turn negative (i.e. point to excess capacity) for the BoJ to cut its policy rate. On its own, a slight rise in unemployment won’t be enough to push the output gap into negative territory.