By Leika Kihara

TOKYO (Reuters) – Japan’s dwindling working-age population is leading to structural changes in the labour market that are heightening pressure on firms to hike wages and services prices, the Bank of Japan said in two research papers released on Tuesday.

The findings support the central bank’s argument that broadening inflationary pressures warrant raising interest rates steadily from current near-zero levels.

Permanent workers’ pay has remained stagnant despite intensified labour shortages since the mid-2010s, as female and elderly workers filled the gap by taking on low-paid, part-time jobs.

However, this trend is changing. A diminishing pool of female and elderly workers, an increase in job hoppers, and rising pay for part-time jobs are prompting firms to increase pay for permanent workers, according to the BOJ’s research paper on Japan’s labour market.

“Labour shortages are triggering changes in companies’ wage-setting behaviour,” the paper states. “The scope for additional labour supply is likely to gradually shrink, which is seen keeping upward pressure on wages.”

This wage pressure is beginning to replace raw material costs as the main driver of inflation, indicated the BOJ in another paper on Japan’s service-sector prices.

Services such as English lessons, tuition, and massages have experienced price increases due to rising labour costs, the paper noted.

“With wage pressure heightening, companies’ price-setting behaviour is changing and propping up service-sector prices, which had hovered around zero since the late 1990s.”

The BOJ concluded negative interest rates in March and raised short-term borrowing costs to 0.25% in July, anticipating that a solid economic recovery will help maintain inflation at its 2% target.

BOJ Governor Kazuo Ueda affirmed that the central bank will continue to raise interest rates if economic growth and inflation align with its projections.