By Max Sato
The government plans to put together an economic stimulus package, with which it hopes to help businesses move toward investing in new growth areas from playing safe with cost cuts.
In its October report, the government said the economy is “recovering at a moderate pace,” repeating the assessment after upgrading it for the first time in 10 months in May. Until April, the economy had been “picking up moderately, although some weaknesses are seen.”
The government repeated its request first made in May 2022 that the Bank of Japan should “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increase.”
At its Oct. 30-31 meeting, the BOJ policy board is expected to maintain its monetary easing stance in a unanimous vote, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
Governor Kazuo Ueda told a post-meeting news conference on Sept. 22 that the bank’s policymakers “cannot possibly pre-determine the timing of policy change or specific responses,” reminding that it may take some more time before clear indications for continued substantial wage hikes and stable 2% inflation emerge.
Ueda also said the risk of under-easing is still greater than over-easing because Japan has experienced years of deflation and low inflation.
In July, the board decided in an eight to one vote to make the bank’s reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations. The July vote on the overall easing stance was unanimous.
By providing “greater flexibility” to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
For its part, the government will support widespread wage hikes and robust business investment under Prime Minister Fumio Kishida’s “new capitalism” programs. It aims to guide firms from cost cuts, a common practice for survival that has been in place for 30 years, toward sharing profits with workers and investing more in growth areas.
Using its “comprehensive” economic plans drawn up recently, the government will help “strengthen supply side that will powerfully promote change” and “improve people’s sense of well-being,” which should reduce sources of instability in the economy and tide over elevated costs for daily necessities.
To this effect, the government will submit a supplementary budget to the current 55-day extraordinary session of the Diet that is scheduled to end on Dec. 13.
As for overseas economies, the government maintained its overall assessment after upgrading it for the first time in 21 months in May, saying, “The world economy is picking up, although some regions are showing weakness.”
The government continues to see “recovery” in the U.S. economy and a “stalled pickup” in China. It downgraded its view on the German economy for the first time in eight months, saying it has a “weak tone.”
Japan’s Economy to Stay on Recovery Track; Downside Risks Remain
On the near-term outlook for the Japanese economy, the government repeated its recovery outlook adopted in May, saying, “The economy is expected to continue recovering at a moderate pace with improving employment and income conditions, supported by the effects of the policies.”
“However, slowing down of overseas economies is a downside risk to the Japanese economy, including the effects of global monetary tightening and the concern about the prospect of the Chinese economy,” the government warned, repeating its concern over the challenges facing the world’s second largest economy arising from heavily indebted property developers.
“Also, full attention should be given to price increases, the situation in the Middle East and fluctuations in the financial and capital markets,” it said, adding the Israeli-Palestinian conflict to the list.
The yen remains weak around ¥150 to the dollar, eroding Japan’s purchasing power. The dollar is close to a 32-year high of ¥151.94 hit in October last year, when Japan’s second wave of massive yen-buying forex intervention pushed the U.S. currency down to a low of ¥143.55 in the same month.
Key points from the monthly report:
The government upgraded its assessment of business sentiment for the first time in three months, saying it is “improving moderately as a whole.” Previously, it was “picking up.”
Confidence among major manufacturers in Japan picked up at a faster-than-expected pace in September after posting its first rise in seven quarters in June, the Bank of Japan’s quarterly Tankan business survey released on Oct. 2 showed.
In the third quarter, improved supply chains supported the auto industry, the heat wave boosted food and beverage makers and the recent jump in energy prices propped up refiners, offsetting sluggish demand for production machinery amid slower global growth.
But the BOJ survey also pointed to broad-based labor shortages, the government warned, particularly among smaller non-manufacturers that saw its employment conditions index (excess labor minus shortages) slide to a four-year low of minus 44, close to the record low of minus 48 hit in the March 1991 survey.
The government maintained its assessment of private consumption, which accounts for about 55% of the gross domestic product, after upgrading it for the first time in 10 months in May, saying it is “picking up.”
Consumer spending on services remains solid as people have been eating out and traveling more freely since the government lifted many of its Covid restrictions in May. On the goods side, the lingering heat wave boosted demand for air conditioners and washing machines. Purchases of mobile phones also rose as new models were introduced.
At the same time, the government noted that consumer sentiment has been flat as many households are hit by elevated costs for daily necessities.
Consumer inflation in Japan eased in all three key measures in September as energy subsidies continued to push down electricity and natural gas utility costs and markups in processed food prices are peaking, data from the Ministry of Internal Affairs and Communication released this month showed. The core measure (excluding fresh food prices), which is closely watched by BOJ policymakers, indicated a clear slowdown, with its annual rate decelerating to a 13-month low of 2.8% in September from 3.1% in August.
However, consumer inflation in Tokyo, the leading indicator of the national average, unexpectedly accelerated to 2.7% in October in the core CPI after slowing to a 14-month low of 2.5% in September as halved subsidies for electricity and natural gas utilities slowed the recent sharp drop in overall energy costs, offsetting the effects of smaller processed food markups, data released last week showed.
Japan’s real household spending posted its sixth straight drop on the year in August, down 2.5%, as high costs have prompted more selective consumption patterns, with many switching to discount mobile phone plans, holding simpler ceremonies and cutting after-school tutoring, data released earlier this month by the Ministry of Internal Affairs and Communications showed. But the decline came in smaller than expected as the first summer holiday season in four years without Covid public health restrictions helped further boost pent-up demand for traveling and eating out.
The BOJ’s supply-side Consumption Activity Index rebounded a seasonally adjusted 0.7% on the month in August after being flat (-0.0%) in July and falling 0.5% in June. The index rose 0.3% in the July-August period compared to the April-June quarter, when it dipped 0.6%. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government maintained its view on employment conditions after upgrading it for the first time in 11 months in June, saying they are “showing signs of improvement.”
Japanese payrolls posted their 13th straight growth on year in August as hotels, restaurants, hospitals and construction firms continued to fill job vacancies while the unemployment rate was unchanged at 2.7% after rising unexpectedly to the level in July from 2.5% in June as a fall in job cuts offset a rise in quits for better positions, data released last month by the Ministry of Internal Affairs and Communications showed.
The jobless rate is forecast to improve slightly to 2.6% in September in Tuesday’s data. Some of the people who had quit earlier to look for better openings appear to have found work in the past couple of months.
On the downside, the latest data from the Ministry of Health, Labour and Welfare indicated that wage growth is lagging inflation.
Total monthly average cash earnings per regular employee in Japan posted their 20th straight year-on-year rise, up 1.1% in August, after rising 1.1% in July and 2.3% in June. The recent slower pace was due to a decline in bonuses and other special pay in August and no growth in overtime pay in July. In real terms, average wages fell 2.5% on year in August for the 17th consecutive drop after slumping 2.7%.
The government maintained its assessment of exports after upgrading it for the first time in three months in August, saying they are “showing signs of a pickup.”
The index of export volumes rebounded a seasonally adjusted 6.2% on the month in September after slumping 6.7% in August and rising 3.5% in July, according to the Cabinet Office.
Japanese export values posted their first year-over-year rise in three months, 4.3%, to a record high in September, thanks to solid demand for automobiles from the U.S. and Europe amid improved supply chains, leading to the country’s first trade surplus in three months, data released this month by the Ministry of Finance showed.
The BOJ’s real export index rose 4.6% on the month in September after falling 6.1% in August and rising 1.3% in July. The increase was led by a sharp rebound in shipments of capital goods as well as gains in exports of intermediate goods and autos and auto parts. Demand for information technology goods remained sluggish.
The government also maintained its assessment of industrial production after upgrading it for the first time in nine months in May, saying factory output “is showing signs of a pickup.”
Japan’s industrial production fell 0.7% on the month in August for a second straight drop (revised down from being unchanged in the preliminary reading), as higher output of gasoline and heating oil was more than offset by a pullback in automobile production among others, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers conducted last month indicated that output is expected to post a solid 3.7% gain in September and rise a further 3.8% in October. The median economist forecast for September output, due Tuesday, is a smaller 2.5% rise.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up” (unchanged; upgraded in May 2023; downgraded in February 2022).
* Business investment is “picking up” (unchanged; upgraded in October 2022; downgraded in December 2021).
* Housing construction is “in a weak tone” (unchanged; upgraded in June 2022; downgraded in September 2023).
* Public investment is “firm” vs. “has been solid” (the first downgrade in 11 months; upgraded in July 2023; last downgraded in November 2021).
* Exports are “showing signs of a pickup” (unchanged; upgraded in August 2023; downgraded in January 2023).
* Imports are “largely flat” (unchanged; upgraded in April 2023; downgraded in January 2023).
* Industrial production is “showing signs of a pickup” (unchanged; upgraded in May 2023; downgraded in March 2023).
* Corporate profits are “improving as a whole” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving moderately as a whole” vs. “picking up” (the first upgrade in three months; last upgraded in July 2023; downgraded in March 2022).
* The number of bankruptcies “has been rising” (unchanged; upgraded in March 2021; downgraded in April 2023).
* Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
* Domestic corporate goods prices are “being flat” (unchanged).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).