–Government to Revive Utility Subsidies for 3 Months to Ease Pain of High Costs, Provide Financial Support to Low-Income Earners
By Max Sato
In its monthly report released Thursday by the Cabinet Office, the government upgraded its view on the world economy as Europe is emerging from the doldrums but also warned that lingering restrictive monetary conditions in other major economies could put a damper on global growth.
The government continued to warn against downside risks from slower growth in other countries, “including the effects of continued high interest rate levels
in the U.S. and Europe and the concern about the prospect of the Chinese economy.”
It also called for a close watch on inflation, the Middle East conflict and “fluctuations in the financial and capital markets” amid continued weakness of the yen that is pushing up import costs. It still mentioned the effects of the powerful New Year’s Day earthquake in the northwestern region of Hokuriku that had reduced electronic parts supply and battered tourism.
After marking its first slump in two quarters in January-March, Japan’s economy in April-June is expected to show modest growth of about 2% annualized as auto production resumed in March. However, more revelations of false safety test records in June, this time at Toyota Motor itself, instead of its subsidiaries, and at other automakers are clouding the near-term growth outlook.
In its June report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing.” Before its February downgrade, it had said the economy was “pausing in some areas.” It expects the economy “to continue recovering at a moderate pace with the improving employment and income situation, supported by the effects of the policies.”
“The government and the Bank of Japan will continue to work closely together to conduct flexible policy management in response to economic and price developments,” the government said, repeating its recent statement. It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, through conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”
The two parties “will completely overcome deflation and help guide the economy move on to a new growth-oriented stage,” the government said, sounding slightly more positive as it stopped saying they “will foster widespread recognition among the public that there is no going back to deflation and will bring deflation to an end.”
In coming months, the BOJ is expected to raise the overnight interest rate target gradually. At its latest meeting on June 13-14, the nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0% to 0.1% for the second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March.
At the same time, the board decided in an 8 to 1 vote to set the stage for gradually reducing the bank’s large holdings of various financial assets for the next year or two “to ensure long-term interest rates would be formed more freely in financial markets.” It will work out a specific plan at its July 30-31 meeting after bank officials have compared notes with market participants.
“Monetary policy adjustment will be done mainly through short-term interest rates,” Governor Kazuo Ueda told a post-meeting news conference on June 14. He said the bank “will not use” the reduction in asset purchases as an “active” monetary policy adjustment tool.
Some market participants expect the BOJ to raise the overnight rate again in July or September, and possibly one more time by year-end or early next year, barring any sharp downturn in economic growth. Ueda wouldn’t confirm or deny whether a July rate hike is possible, saying it will depend on the data that will become available.
The government will support widespread wage hikes by using the antimonopoly act to help smaller firms pass higher costs onto customers and by backing raises in regulated salaries for people working at hospitals, daycares and schools that are lagging behind those at large private-sector companies. It will also assist robust business investment in production of semiconductors, storage batteries and data centers by inviting funds from overseas.
In the first of its two-step approach to help pensioners and small business owners cope with elevated costs, the government will extend its fuel subsides until the end of 2024 and provide “emergency” subsides to lower electricity and natural gas utility bills for the months of August, September and October after ending such fiscal support in May. By taking these actions, Prime Minister Fumio Kishida said Friday that the government will try to bring down the year-on-year increase in consumer prices by at least 0.5 percentage point each month until the yearend.
As a second step, the government plans to give additional cash handouts to pensioners and low-income earners particularly in rural areas to help them pay for high costs of food. It will also provide financial support to farmers, hospitals, schools, transport firms and regional tourism industries that are suffering from elevated costs.
As for overseas economies, the government upgraded its overall assessment for the first time in 13 months. “The world economy is picking up,” it said, leaving out the part that “some regions are showing weakness.”
The government repeated that the Chinese economy is “showing signs of a pickup thanks to the effects of policy measures.” It also continues to say the U.S. economy is “expanding.”
This month, it raised its view on India’s economy for the first time in three months, saying it is “expanding.” It upgraded its view on the Eurozone for the first time in 33 months, saying it is showing signs of a pickup,” instead of having “a weak tone.” Germany and the UK are also showing signs of a pickup, based on their first upgrades in 33 months and 25 months, respectively.
Protracted Weak Yen
The dollar surged to a 34-year high of just above ¥160 on April 29 on expectations that interest rates in Japan will remain low and a U.S. rate cut is unlikely until September, but stealth dollar-selling intervention by the Ministry of Finance pushed the U.S. currency below ¥155. The MOF also quietly stepped into the forex market on May 2, when the dollar dipped to around ¥153 from ¥157. MOF data on May 31 showed it had bought a total of ¥9.79 trillion between April 26 and May 29, a record amount in Tokyo’s dollar-selling intervention.
But the effects of the intervention didn’t last long. The dollar rose to a more than 37-year high of around ¥160.80 on Wednesday on the enhanced notion that the Federal Reserve is unlikely to lower interest rates any time soon if the U.S. economy remains resilient and inflation eases only gradually. Vice Finance Minister for International Affairs Masato Kanda said MOF officials have “serious concerns” over “the recent excessive depreciation of the yen” and threatened to “take necessary measures.”
Previously, the dollar briefly surged to a 32-year high of ¥151.94 in October 2022 but Japan’s two rounds of yen-buying forex intervention (totaling ¥6.35 trillion) pushed it down to a low of ¥143.55 in the same month.
Key points from the monthly report:
The government basically maintained its assessment of industrial production after upgrading it for the first time in 12 months last month, saying factory output “is showing signs of a pickup.” It left out the latter part of the May statement: “… although it has declined due to the effects of suspension of production and shipment by some automakers.”
Japan’s industrial production fell a seasonally adjusted 0.9% (revised down from a 0.1% fall) on the month in April after a 4.4% jump in March, as output by the transport industry excluding automobiles (aircraft engine parts) slumped in payback for a sharp gain in the previous month and vehicle output also slipped from a sharp rebound in March when production resumed after two months of suspension at Toyota group firms over a safety scandal.
From a year earlier, factory output posted a sixth straight drop, down 1.8% (revised down from the initial reading of a 1.0% drop) after a 6.2 percent slump in the prior month, revised data released last week by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is expected to post a solid 2.3% rise on the month in May before falling a sharp 5.6% in June. The median economist forecast for May production, due Friday, is a 2.0% on the month, thanks to emerging positive effects of resumed vehicle output.
The government maintained its assessment of exports, saying their “pickup is pausing.” The index of export volumes fell a seasonally adjusted 4.2% on the month in May after rising 0.8% in April and rebounding 3.3% in March, according to the Cabinet Office.
Japanese export values rose 13.5% on year in May for the sixth straight increase, led by solid global demand for automobiles and Asian purchases of semiconductors, while export volumes were down for the fourth month in a row, data released last week by the Ministry of Finance showed. The pace of increase was slower than the consensus forecast of a 16.1% gain but faster than the 8.3% rise in April.
Shipments to China, a key export market for Japanese goods, posted their sixth straight increase after a year-long decline through November last year amid a gradual recovery in the world’s second-largest economy. Japanese exports to the European Union fell on year for the second straight month, hit by lower demand for automobiles and steel. Exports to the U.S. remain robust, up for the 32nd straight month on autos, after hitting a record high amount in December 2023.
The government maintained its assessment of private consumption, which accounts for about 55% of the gross domestic product, after downgrading it for the first time in two years in February. The pickup in consumption is “stalling,” it said. While nominal consumption is rising on higher wages, real spending has been lackluster as wage hikes are not catching up with high living costs. The government also noted that consumer spending on second-hand cars, clothing and brand name goods has been rising but that this category is not reflected in GDP data.
Real household spending posted the first year-over-year increase in 14 months, up a modest 0.5% on year in April, as expected, after falling 1.2% in March, led by higher school tuition fees and the costs for studying away from home as well as more gift money given at weddings and funerals, data released this month by the Ministry of Internal Affairs and Communications showed.
Some private universities resumed normal tuition charges in the fiscal year that began on April 1 after offering discounts and allowing late payments during the pandemic. As Covid restrictions have been lifted, more students are choosing to rent a place closer to their schools, pushing up the education costs for their parents.
Vehicle purchases fell in April as the impact of suspended production at Toyota group firms over a safety test scandal continued even though output and shipments resumed in March. The weak yen is also discouraging people from buying overseas package tours while demand for domestic tours has waned after subsidies for hotels and transportation aimed at supporting the tourism industry was phased out. People shed spending on fresh vegetables due to high prices.
The BOJ’s supply-side consumption activity index rose a seasonally adjusted 0.5% on the month in April after falling 1.0% in March and rising 1.3% in February. The index edged up 0.3% in the April-May period compared to the January-March quarter, when it dipped 0.9% on quarter. Figures exclude inbound tourism consumption but include outbound tourism spending.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* The pickup in private consumption is “stalling” (unchanged; upgraded in May 2023; downgraded in February 2024).
* Business investment is “showing signs of a pickup” (unchanged; upgraded in March 2024; downgraded in November 2023).
* Housing construction is “in a weak tone” (unchanged; upgraded in June 2022; downgraded in September 2023).
* Public investment is “firm” vs. “solid” (the first downgrade in eight months; upgraded in May 2024; last downgraded in October 2023).
* The pickup in exports is “stalling” (unchanged; upgraded in August 2023; downgraded in January 2024).
* Imports are “largely flat” (unchanged: upgraded in May 2024; downgraded in March 2024).
* Industrial production is “showing signs of a pickup” vs. “showing signs of a pickup, although it has declined due to the effects of suspension of production and shipment by some automakers (phrase changed; upgraded in May 2024; downgraded in February 2024).
* Corporate profits are “improving as a whole” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving but some manufacturers are affected by the suspension of production and shipment by some automakers” (unchanged; upgraded in December 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 “have been rising at a moderate pace” (unchanged; last changed in May 2024).
* Consumer prices “have been rising at a moderate pace” (unchanged: upgraded in May 2022; downgraded in March 2020).