Japan's Labor Gap Fuels Inflation as Women and Migrants Hold Key

Bank of Japan Governor Kazuo Ueda has emphasized that expanding the participation of women in full-time employment and increasing the share of foreign workers in the labor force are critical to addressing Japan’s labor shortage, which is exacerbating inflationary pressures. Speaking at the Federal Reserve’s Jackson Hole symposium, Ueda highlighted that only about 50% of employed women in Japan work full-time, compared to 80% of men. He noted that expanding childcare and after-school care services could help bridge this gap [1]. Meanwhile, foreign workers currently make up just 3% of Japan’s labor force, yet accounted for more than half of labor force growth between 2023 and 2024 [2].

Ueda’s comments underscore the challenges posed by Japan’s rapidly aging population and declining birth rate, which have led to a shrinking labor force. The country’s population has been in continuous decline for the past 14 years, and nearly 30% of its population is now aged 65 or older. These demographic trends have been partially offset in recent years by years of zero inflation, economic stagnation, and structural policies aimed at encouraging labor supply. However, Ueda stressed that the potential for further increases in labor participation, particularly among women and seniors, is limited [1].

Japan’s labor market remains tight, with an unemployment rate of 2.5% for the fourth consecutive month in June. According to a survey by the Teikoku Databank, approximately three-quarters of Japanese businesses have cited labor retention as a primary reason for raising wages. The Bank of Japan has linked this tightness to upward pressure on wages and, by extension, to inflation [2]. Annual consumer price increases have remained above the BOJ’s 2% target for over three years, reaching a 3.1% year-on-year increase in July, excluding fresh food [1].

Ueda defended the BOJ’s cautious approach to tightening monetary policy, noting that underlying inflation is still below the central bank’s goal when viewed comprehensively. However, market expectations for another rate hike are growing, fueled by persistent price pressures and steady economic growth. This speculation has pushed the 10-year Japanese government bond yield to its highest level since 2008. The BOJ has indicated that it will continue to raise borrowing costs if its economic outlook is realized, though it has not explicitly stated when the next rate hike may occur [2].

Ueda’s remarks at Jackson Hole represent his second major international appearance since taking the helm at the BOJ. Last year’s rate hike, which caught some markets off guard, led to financial volatility and prompted his absence from the previous symposium. This year’s focus on labor markets reflects the broader G7 interest in how demographic pressures and workforce composition are shaping inflation and economic growth [1].

Source: [1] BOJ's Ueda Says Women, Foreign Workers Could Help Fill ... (https://www.bloomberg.com/news/articles/2025-08-23/boj-s-ueda-says-women-foreign-workers-could-help-fill-labor-gap) [2] Ueda Expects Tight Labor Market To Keep Upward ... (https://www.ndtvprofit.com/global-economics/ueda-expects-tight-labor-market-to-keep-upward-pressure-on-wages)