BOJ keeps upbeat view on regional Japan, labor shortages cloud outlook

TOKYO (Reuters) - The Bank of Japan maintained its upbeat economic assessment for all nine regions of the country but some areas saw companies fret about rising costs from labor shortages, a sign that a tightening job market could constrain business activity.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan June 15, 2018. REUTERS/Issei Kato

In a quarterly report on regional conditions, the central bank on Monday said all areas were either recovering or expanding, thanks to robust overseas demand and improving private consumption.

The BOJ revised up its assessment on capital expenditure for three regions, as many firms ramped up spending on equipment to streamline operations and compensate for labor shortages.

“Japan’s economy is expected to continue expanding moderately,” BOJ Governor Haruhiko Kuroda said in a speech at the quarterly meeting of regional branch managers.

He also said the BOJ will maintain its ultra-easy policy until inflation hits its 2 percent target, a sign the bank will lag behind its major peers in unwinding crisis-mode policies.

While many regions were enjoying a steady recovery backed by solid demand, some areas saw more firms complaining that labor shortages were pushing up costs and affecting production.

“The tightening job market continues to help lift wages and household income,” Yasuhiro Yamada, the BOJ’s Osaka branch manager, told reporters.

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"But we're also hearing more firms say parts and labor shortages are constraining their businesses," said Yamada, who oversees the Kansai western Japan region - home to electronic giants such as Panasonic 6752.T.


While some wholesale and transportation firms have succeeded in raising prices to meet higher costs, many retailers have failed to do so for fear of losing market share, said Sho Kotaka, branch manager of Sapporo, northern Japan.

“It’s clear labor shortages are hurting business sentiment,” she said. “Not all companies have sufficient price-setting power.”

BOJ Fukuoka branch manager Toshiro Miyashita also said rising labor and raw material costs were squeezing profits at firms “across sectors” in the southern Japan region he oversees.

Escalating trade frictions between the United States and China were cited as key risks from overseas. Some firms in central Japan have seen profits hurt from slowing electronic parts exports, a branch manager overseeing the region said.

Several branch managers said heavy rain in western Japan recently could also have an impact on plant operations, goods distribution and consumer sentiment.

Rescuers dug through mud and rubble on Monday, racing to find survivors after torrential rains unleashed floods and landslides that killed at least 112 people, with dozens missing.

The BOJ’s regional report is among factors the central bank will scrutinize at its next rate review on July 30-31.

More than five years of heavy money printing have helped reflate the economy but failed to fire up inflation, which remains well below the BOJ’s ambitious target.

Last week, Japan’s government projected that the economy will grow faster than private-sector forecasts in the fiscal year ending in March 2020, with exports, consumption and capital spending expected to offset the hit from a planned sales tax hike next year.

Reporting by Leika Kihara; Editing by Kim Coghill and Richard Borsuk