By Max Sato
In its monthly report for November released Tuesday by the Cabinet Office, the government said the economy is “recovering at a moderate pace, although there are some areas where it is pausing.”
Looking ahead, “the economy is expected to continue recovering at a moderate pace with the improving employment and income conditions, supported by the effects of the policies.” The government will temporarily revive utility subsidies to help lower electricity and natural gas bills during the winter heating season from January to March. It will also provide cash handouts to low-income families.
The report came a day after President-elect Donald Trump said he would impose a 25% tariff on all goods from Mexico and Canada as soon as he takes office on Jan. 20, and that he would also slap an additional 10% tariff on imports from China, all part of his drive to crack down on illegal drugs and immigration.
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.”
It also repeated the need to keep a close watch on “the effects of price increases, future policy trends in the U.S., the situation in the Middle East and fluctuations in the financial and capital markets.” The yen remains relatively weak at around Y154, compared to Y143 at the start of 2024, keeping Japanese imports costly.
The government repeated that with the Bank of Japan it “will continue to work closely together to conduct flexible policy management in response to economic and price developments.” 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 central bank is widely expected to raise its policy interest rate by 25 basis points to 0.5% at its next meeting on Dec. 18-19 and lift it to around 1% by the end of 2025. This is part of its policy normalization process that began in March with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework, following a decade of large-scale monetary easing aimed at reflating the economy.
Last month, the BOJ’s nine-member board decided in a unanimous vote to maintain the target for the overnight interest rate at 0.25%, as widely expected, after leaving it steady in September and voting 7 to 2 to hike the rate to the current level from a range of 0% to 0.1% in July.
The government continues to view the Chinese economy as “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 that both the Eurozone and the U.K. economy are “picking up.” It downgraded its view on Thailand, saying its economy has a “weak undertone.”
Key points from the monthly report:
The government maintained its assessment of private consumption, which accounts for about 55% of gross domestic product, saying it is “picking up while weakness remains in some areas.”
Real household spending posted a smaller-than-expected 1.1% drop on year in September for a second straight decline as consumers remain frugal amid high costs for necessities, but the core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, eked out a slight 0.3% gain, following a similarly flat reading (-0.1%) the previous month.
The BOJ’s supply-side consumption activity index marked the second straight month-on-month fall in September, down a seasonally adjusted 0.2%, after sliding at the same rate in August and rising 0.8% in July. The index rose a solid 0.9% on quarter in the July-September period after rising 0.2% in April-June and falling 0.8% in January-March. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government maintained its view on industrial production after downgrading it for the first time in eight months in October, saying factory output is “flat.”
Industrial production rebounded 1.6% on the month in September, following a 3.3% slump in August and a 3.1% rise in July. The increase was in line with a rebound in real exports and due largely to the auto industry as Toyota Motor had resumed output of some models suspended earlier amid a falsified safety records scandal, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.
METI’s survey of producers indicated that output is expected to rise a solid 5.1% in October, led by manufacturers of production machinery and transport equipment, before falling 3.7% in November on expected lower production of production machinery and semiconductors.
In the October report due Friday, production is forecast to post a second straight rise, up 3.9% on the month.
The government also maintained its assessment of exports, saying they are “largely flat.”
Japanese export values rose 3.1% in October after falling 1.7% in September, which was their first year-on-year drop in 10 months. The modest export gain was led by solid demand for semiconductor-producing equipment, drugs and optical equipment, which were partly offset by drops in mineral fuels, auto parts and iron/steel.
Shipments to China, a key export market for Japanese goods, rose 1.5%, after marking their first fall in 10 months with a 7.3% slump in September. The increase reflects a pickup in demand for semiconductor-producing equipment, computer chips and optical equipment (steppers for chips). However, shipments of automobiles, auto parts and organic compounds (cosmetics) were down as consumption in the world’s second largest economy remains sluggish.
Japanese exports to the European Union fell 11.3% for the seventh straight fall amid sluggish demand for automobiles, ships and construction machinery. Exports to the United States slipped 6.2% for their third straight drop in light of resilient but cooling U.S. economic growth. The decrease was due to lower demand for autos, auto parts and construction/mining equipment. Shipments of drugs showed a sharp increase. Exports to the U.S. recorded their first year-on-year decline in 35 months in August.
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” (unchanged; upgraded in August 2024; 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” (unchanged; upgraded in August 2024’ downgraded in September 2023).
Public investment is “resilient” vs. “solid” (the first downgrade in five months; upgraded in July 2024; last downgraded in June 2024).
Exports are “largely flat” (unchanged; upgraded in August 2023; downgraded in July 2024).
Imports are “showing signs of a pickup” vs. “largely flat” (the first upgrade in six months: last upgraded in May 2024; downgraded in March 2024).
Industrial production is “flat” vs. “showing signs of a pickup” (the first downgrade in eight months; upgraded in May 2024; last 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 pace of increase in bankruptcies is “slowing” (unchanged; upgraded in September 2024; downgraded in January 2023).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices are “rising gradually” vs. “showing a slower pace of increase“ (the first change in wording in two months; last changed in September 2024).
Consumer prices are “rising” vs. “rising at a moderate pace” (unchanged: last changed in January 2024).