Japan's Unemployment Rate Hits Nine-Year Low

Japan's jobless rate fell to a nine-year low of 3.7% in June, data showed on Tuesday, suggesting that tighter job conditions will eventually push up prices as forecast by the Bank of Japan.

The tight labor market kept alive market expectations that the central bank will raise interest rates as early as next month, although global market volatility in recent days has dented the near certainty many in the market had felt about this.

As well, the recovery in personal consumption remains fragile, with separate government data showing that overall household spending in June rose only 0.1% from a year earlier, falling short of a median market forecast of a 0.7% rise.

The June jobless rate, which compared with the consensus forecast of 3.8%, was the lowest since 3.6% marked in February 1998.

"The fact that the jobless rate is falling steadily is positive for the economy," said Naoki Iizuka, a senior economist at Mizuho Securities. "The job data itself won't directly affect monetary policy. But it does support the BOJ's scenario that the nation's supply-demand gap is narrowing and will gradually push up prices," he said. "In that sense, it's supportive for a central bank rate hike."

Financial markets did not react much to the figures.

In a sign of improving job conditions, the jobs-to-applicants ratio for June was 1.07, meaning 107 jobs were available per 100 applicants, slightly above the market consensus figure of 1.06. The June figure compared with a ratio of 1.06 in May.

The BOJ has said it would need to raise rates gradually in line with improvements in economic and price conditions.

Many analysts still believe the next rate hike will come as early as August, but expectations of a policy change next month have edged down after falls in Japanese stocks and broader jitters over U.S. subprime loan woes.

Some economists also worry about the outlook for Japan's personal consumption, which has been recovering but so far has failed to gain much momentum.

"The household spending data was in line with our view that household consumption is unlikely to accelerate," said Junko Nishioka, an economist at ABN Amro Securities. "The local tax hike in June could hurt consumer sentiment and keep a tab on spending," she said, adding that a BOJ rate hike is more likely in September than in August.

The BOJ has kept monetary policy on hold after raising the key policy rate to a decade-high 0.5% in February, in the first rate rise since July last year.

The central bank has said private consumption will increase as corporate-sector strength gradually filters through to household spending.

But a purchasing survey showed on Tuesday that the strength of the corporate sector may be losing steam.

Japanese manufacturers' activity in July contracted for the first time since May 2003, reflecting weak output and demand.

The NTC Research/Nomura/JMMA Purchasing Managers Index, which gives an early snapshot of the health of manufacturing, declined to a seasonally adjusted 49.0 in July from 50.4 in June.

A reading above 50 suggests expansion, while a figure below points to a contraction.