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Japan’s companies can be short of workers without being uniformly confident about their customers. That is the awkward combination in the Bank of Japan’s latest quarterly Tankan survey, published on October 1st. Large manufacturers became more optimistic between June and September. Large non-manufacturers became less so. Across the survey’s employment categories, however, firms continued to report insufficient staff. The survey’s employment balance for all firms sank to −38 from −37: far more companies say they have too few workers than too many.

The contrast matters beyond the next interest-rate decision. On October 20th Reuters reported, citing sources, that the central bank might lift an inflation forecast while leaving rates unchanged at its forthcoming meeting. That is a report about possible policy, not a decision. The underlying economic question is more durable: can firms pay enough to attract scarce workers when their customers resist higher prices?

Different kinds of pressure

The Tankan’s business-conditions balance for large manufacturers rose from 22 to 24. For large non-manufacturers it fell from 37 to 35. These are percentage-point balances between firms judging conditions favourable and unfavourable, not percentages by which production grew or fell. A declining positive balance means optimism has become less widespread; it does not establish that an industry is contracting.

The staffing measure asks a different question. It compares the shares reporting excessive and insufficient employment. The September tables show shortages among large, medium-sized and small businesses in both manufacturing and non-manufacturing. Smaller non-manufacturers reported a particularly pronounced imbalance. The survey is a measure of employers’ assessments, not a count of unfilled jobs.

Separating the measures avoids a tempting but mistaken inference. A company can find labour difficult to obtain because suitable workers are scarce locally, even if its sales are disappointing. A staffing shortfall measures a constraint relative to the operation the firm wants to run. It is not proof that customers are clamouring for more output at any price.

Reuters’ account of the release attributed manufacturers’ improvement partly to strong AI-related demand and receding supply constraints. It reported that service businesses were feeling higher material and labour costs while consumers resisted price increases. That offers a plausible explanation for the divergence. It does not establish that every factory is thriving or every service business is struggling.

The supply of people

Demography helps explain why weak confidence need not eliminate recruitment problems. The OECD’s July Employment Outlook described persistent Japanese labour shortages associated with population decline and ageing, particularly outside manufacturing and among smaller employers. Its assessment predates the latest Tankan. The new survey shows that the staffing problem had not disappeared by September.

Yet a shrinking working-age population is not a sufficient account of everything happening to employment. In a speech in August last year, Kazuo Ueda, the BOJ’s governor, explained how rising participation by women and older people had cushioned demographic pressure. He also argued that further gains would require changes in working arrangements and access to employment. Population arithmetic and the effective supply of labour are related, but not identical.

The OECD’s economic survey of Japan, published in May, makes that distinction concrete. Women’s care responsibilities can restrict the jobs they can take. Older workers are often moved into non-regular employment after mandatory retirement. Non-regular workers have less access to training. More people in employment need not mean that their skills are being used fully or that they can move to the firms that need them.

For employers, this shifts the question from how many applicants exist to what sort of job is on offer. Reliable hours, useful training and a route to more secure employment can matter alongside wages. That is an inference from the institutional barriers identified by the OECD, not evidence that a particular employment package would fill every vacancy.

Adjustment is not painless

Mr Ueda’s earlier speech described another response: competition for staff encourages labour-saving investment and movement between firms. Businesses unable to match pay elsewhere may merge or close. Workers can then move towards more productive employers. But this is a possible mechanism of adjustment, not a guarantee that every displaced employee will find a better local job.

The geographical qualification matters. The OECD’s July assessment highlighted differences in employment opportunities across Japanese regions and limited mobility from weaker to stronger labour markets. A national vacancy problem can coexist with poor prospects in particular places. Counting available workers and available jobs together misses the cost of moving, retraining and reorganising family life.

Nor is equipment an automatic substitute for people. A business must be able to finance it, integrate it into its operations and use the time saved productively. The sensible test is whether an investment allows existing staff to deliver more or better service. Buying technology while preserving inefficient processes need not achieve that result.

These distinctions also clarify the policy challenge. Easing recruitment barriers and improving training address productive capacity. Interest rates affect demand and financing conditions. Neither lever removes the need for the other, and a shortage reported by employers cannot alone tell a central bank how quickly wages will translate into consumer prices.

The next wage and hiring decisions will therefore be more informative than a single reassuring headline about business confidence. Japan needs pay gains that improve living standards, employers capable of sustaining them and institutions that let workers reach better opportunities. Its latest survey shows the constraint. Whether scarcity becomes an impetus to higher productivity, or simply another cost squeezed into weak margins, remains unresolved.