By Max Sato
In its monthly report for August released Thursday by the Cabinet Office, the government said the economy is “recovering at a moderate pace, although there are some areas where it is pausing.” Last month, it said the economy was “recovering at a moderate pace, although it appears to be pausing.”
In the April-June quarter, the economy posted a stronger-than-expected rebound after suffering its first contraction in two quarters in January-March, up a preliminary 0.8% on quarter, or an annualized 3.1%, as consumption and business investment picked up after having been hit by suspended output at Toyota group factories over a safety test scandal, Cabinet Office data released this month showed.
Looking ahead, the economy in July-September is expected to show moderate growth as large firms are raising wages at the fastest pace in 33 years and investing in capacity to cope with labor shortages. Real wages rose 1.1% on the year in June, marking the first rise in 27 months, after falling 1.3% the previous month.
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 lingering stagnation of the real estate market in China.”
The Bank of Cananda cut its policy rate for the second straight month in July, citing easing inflationary pressures and cooling economy, and appears set to follow up with more cuts by the end of the year. The U.S. Federal Reserve is widely expected to start lowering interest rates in September.
The government continued to urge a close watch on inflation, the Middle East conflict and “fluctuations in the financial and capital markets” amid the protracted weakness of the yen that is keeping import costs high.
At its July 30-31 meeting, the Bank of Japan’s nine-member board decided in a 7 to 2 vote to raise the overnight interest rate target to 0.25% from a range of 0% to 0.1%, citing gradually rising inflation expectations among households and businesses and high but slightly easing uncertainties for the economy. It followed the bank’s first rate hike in 17 years in March, which also ended the seven-year-old yield curve control framework, as part of its policy normalization process.
“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 statements. 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, by 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, suggesting it is still concerned about the downside risk that inflation may fail to be backed by sustained wage hikes.
This month, the yen has regained most of its lost ground for the year, quoted at around ¥146, on market expectations that the BOJ was set to raise its short-term interest rate target more often than previously believed, although it would be still at a snail’s pace compared to other major economies.
Governor Kazuo Ueda told reporters on July 31 that a “gradual” pace of rate hikes at an early stage is better than jacking up interest rates later when upside risks to inflation materialize, and that BOJ policymakers don’t consider 0.5% a ceiling for the policy rate, which is still far below the zone that can be regarded as neutral to economic activity (one board member believes the terminal rate is 1% at the lowest).
In an Aug. 7 speech, Deputy Governor Shinichi Uchida sought to calm jittery investors by saying rate hikes in Japan are different in nature compared to those in Europe and North America. “Japan’s economy is not in a situation where the bank may fall behind the curve if it does not raise the policy interest rate at a certain pace,” he said. “Therefore, the bank will not raise its policy interest rate when financial and capital markets are unstable.”
In July, the dollar hit a fresh 38-year high above ¥161.70 but it has eased to around ¥154 on stealth yen-buying invention on July 11 and 12 by the Ministry of Finance that took advantage of US CPI data for June showing easing inflation. The data prompted some dollar selling on the notion that the Fed may lower interest rates in September.
As for overseas economies, the government maintained its overall assessment after downgrading it for the first time in 18 months, only a month after upgrading it for the first time in 13 months. “The world economy is picking up, although it is pausing in some regions.”
The government maintained its view on the Chinese economy after downgrading it for the first time in 11 months in July, saying, “The economy is pausing even though there is an increase in supply thanks to the effects of policy measures.”
It regards the U.S. economy as “expanding” while noting the Eurozone is “picking up” and upgrading its view on the UK, saying it is “picking up,” instead of “showing signs of a pickup.”
Key points from the monthly report:
The government upgraded its assessment of private consumption, which accounts for about 55% of the gross domestic product, for the first time in 15 months, saying it is “picking up while weakness remains in some areas.” Previously, it said the pickup in consumption was “stalling.”
Real household spending posted its second straight year-over-year drop in June, down 1.4%, but excluding volatile factors like home maintenance and car purchases, the core reading marked its first increase in 16 months, up 1.3%, as the killer heat wave boosted demand for air conditioners and refrigerators, data released this month by the Ministry of Internal Affairs and Communications showed.
An unusually late start to the rainy season in many regions also propped up demand for beverages, snacks, eating out and summer clothing. The rare rise in the core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, followed a 3.4% dip in May and no growth in April.
The BOJ’s supply-side consumption activity index rebounded 0.8% on the month in June on a seasonally adjusted basis after falling 0.5% in May and rising 1.1% in April. The index rose 0.8% in the April-June period compared to the January-March quarter, when it fell 0.8% on quarter. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government maintained its assessment of exports after downgrading it for the first time in six months in July, saying they are “largely flat.” The index of export volumes rose a seasonally adjusted 1.3% on the month in July after rising 2.1% in June and falling 4.2% in May, according to the Cabinet Office.
Japanese export values rose 10.3% for the eighth straight year-over-year increase in July, led by solid demand for semiconductors, automobiles and semiconductor-making equipment from the U.S. and Asia, accelerating from a 5.4% gain in June and overcoming continued sluggish shipments of some of those goods to Europe, data released last week by the Ministry of Finance showed.
Shipments to China, a key export market for Japanese goods, posted their eighth straight increase thanks to demand for semiconductor-making equipment and autos, while the Japanese government has expressed concerns over the slow progress in China’s recovery from its property market problems. Japanese exports to the European Union fell on year for the fourth straight month, hit by lingering sluggish demand for automobiles and production machinery, although shipments of iron and steel rebounded. Exports to the U.S. remain robust, up for the 34th straight month on autos and auto parts, after hitting a record high amount in December 2023.
The government also maintained its assessment of industrial production after upgrading it for the first time in 12 months in May, saying factory output “is showing signs of a pickup.”
Japan’s industrial production slipped a seasonally adjusted 4.2% (revised down from a 3.6% dip) on the month in June, giving up all of the sharp 3.6% rebound in May, hit by more revelations of false safety test records in June, this time at Toyota Motor itself, instead of its subsidiaries, as well as at other major automakers, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is expected to rise 4.0% in July after adjustment for its upward bias, led by a rebound in production machinery and electronic parts/devices, before rising a further 0.7% in August on higher output of electric and information communications equipment which may include lithium-ion rechargeable batteries.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up while weakness remains in some areas” vs. the pickup in private consumption is “stalling” (the first upgrade in 15 months; last 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 “largely flat” vs. “in a weak tone” (the first upgrade in 26 months; last upgraded in June 2022; downgraded in September 2023).
* Public investment is “solid” (unchanged; upgraded in July 2024; downgraded in June 2024).
* Exports are “largely flat” (unchanged; upgraded in August 2023; downgraded in July 2024).
* Imports are “largely flat” (unchanged: upgraded in May 2024; downgraded in March 2024).
* Industrial production is “showing signs of a pickup” (unchanged; 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” (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).