By Max Sato
(MaceNews) – Japan’s government Thursday maintained its economic overview after upgrading it last month, indicating consumption is leading a pickup in domestic demand amid a spike in Covid cases while firms are keen to invest in equipment for streamlined and greener operations, according to its monthly report released by the Cabinet Office.
At the same time, the government pointed to a clearer downside risk from slowing growth in the U.S. and other major economies in the face of continued credit tightening by many central banks. It also cautioned against the impact of rising costs for both households and businesses.
In its August report, the government said the economy is “picking up moderately.” It upgraded the view in July from its previous statement that the economy was “showing signs of a pickup.”
It repeated its request first made in May that the Bank of Japan should “achieve the price stability target of two percent in a sustainable and stable manner.” The government noted that the BOJ has maintained its easing stance to support smaller businesses and ensure financial market stability during the pandemic.
Last month, the BOJ decided to maintain its super-low interest rate targets along the yield curve and large asset purchases, as expected, to help the economy recover to pre-pandemic levels and anchor inflation around its stable 2% target.
As for overseas economies, the government downgraded its assessment for the first time in three months, saying, “The pace of the pickup is slowing.” Last month, it said they were “picking up while stalling in some areas.”
By country, the government revised down its views on the U.S. and South Korea for the first time in nine months and made its first downgrade of the UK economy in 20 months while upgrading its views on Indonesia and Thailand. Last month, it had already noted a slower pace of pickup in Germany.
Japan’s view on the Chinese economy was largely maintained this month after the first upgrade in four months in July, when shipments through Shanghai showed a continued improvement after Beijing ended its lockdown of the key port city at the end of May. In August, however, the heat wave and scant rainfall caused water and electricity supply restrictions to provinces along the Yangtze River, forcing factories to suspend or shorten operations.
On the near-term outlook for the Japanese economy, the government repeated its recent view, saying, “The pickup in the economy is expected to continue, supported by the effects of the policies and economic and social activities are moving toward normalization.”
“However, slowing down of overseas economies due to global monetary tightening and other factors is a downside risk to the Japanese economy,” the government warned. “Also, full attention should be given to the impact of price increases on households and businesses and supply-side constraints.
Last month, the government had cautioned against the drag from “fluctuations in the financial and capital markets amid global monetary tightening, rising raw material prices and supply-side constraints,” highlighting the risk posed by the recent sharp depreciation of the yen and unstable stock markets. Since then, the dollar/yen exchange rate has been moving in a tight range and the Nikkei-225 index has picked up from lows.
Based on its policy mix of large-scale monetary easing, flexible fiscal spending and growth strategies aimed at promoting private investment, the government will continue implementing “flexible macroeconomic policy measures without hesitation” to achieve autonomous growth led by private demand and completely end deflation.
Amid rising costs for daily necessities and slow wage recovery, the government vowed to “compile additional measures by early September to promptly respond to the current price and economic situation, and will implement them swiftly by making flexible use of reserve funds (in the fiscal 2022 budget).”
“In addition, the government will take bold measures seamlessly, without being bound by precedent, depending on the situation,” according to the August report.
Key points from the monthly report:
After an upgrade in July, the government maintained its assessment on private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up moderately.”
It was the first summer in three years without strict public health restrictions, which allowed people to travel more freely and go to festivals, concerts and sporting events. Domestic new vehicle sales posted the 13th straight year-on-year decline in July, hit by lingering supply bottlenecks, but the pace of decrease decelerated to 7.4% from 10% in June.
On the downside, real wages are falling due to widespread markups in food and energy (except for gasoline prices) and despite improving job creation, hurting sentiment.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from July 25 to July 31 and released on Aug. 8 indicated that high producer costs and rising consumer prices as well as record numbers of new coronavirus infections and deaths as clouding the outlook.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted the second straight monthly drop, slumping 9.1 points to a five-month low of 43.8 in July on a seasonally adjusted basis, after dipping 1.1 points to 52.9 in June and rising 3.6 points to 54.0 in May. The index slipped under the key 50 line for the first time since April (47.8) and stayed well below the 16-year high of 57.5 hit in December 2021 (the highest since 57.7 in December 2005).
The Watchers’ outlook index, which shows sentiment in two to three months, also marked the second consecutive decline, falling 4.8 points to a six-month low of 42.8 in July after slipping 4.9 points to 47.6 in June and rising 2.2 points to 52.5 in May. January’s 7.8-point decline to 42.5 was the lowest since 36.9 in December 2020.
In its monthly report, the government revised up its assessment of industrial production for the first time in seven months, saying it is “showing signs of a pickup.” Previously it had said “its pickup is stalling.”
Japan’s industrial production rebounded more strongly than expected in June as China ended its Covid lockdown of Shanghai but parts shortages and logistical bottlenecks continued to prevent a fast recovery from the pandemic, preliminary data released last month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicate that output will lose some steam in July but pick up in August as supply constraints are showing signs of some easing and demand for consumer electronics remain strong. The ministry upgraded its view in July after downgrading for the second month in a row in June, saying industrial production is “making one step forward and one step back.” Previously, the METI had said output was “weakening.”
The government also upgraded its view on public investment for the first time in four months, saying it is “becoming firmer,” compared to its preview statement that it was “firm.” Public works spending marked the first quarter-on-quarter rise in six quarters in the first quarter as the government implemented projects included in the supplementary budget for the fiscal 2021 budget.
The government maintained its assessment of exports as being “largely flat” after downgrading it in November last year. Shipments to Asia and Europe are showing signs of a pickup while those to the U.S. are flat. The outlook for the global semiconductor market has downside risks as rising prices are dampening demand for smartphones and computers.
The export volume index calculated by the Cabinet Office posted the third straight monthly rise in July, up a seasonally adjusted 0.1%, but the pace was much slower than increases of 1.5% in June and 1.8% in May.
Japanese exports maintained a high pace of growth from a year earlier in July, hitting a record high value for the second straight month on solid global demand for semiconductor-producing equipment and electronic parts amid elevated producer costs, data released last week by the Ministry of Finance showed.
At the same time, export volumes marked the fifth straight year-on-year decline as the outlook for global economic growth remains uncertain over whether aggressive interest rate hikes by major central banks can ease inflationary pressures without causing a slump.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up moderately” (unchanged; last upgraded in July 2022; downgraded in February 2022).
* Business investment is “showing signs of a pickup” (unchanged; upgraded in February 2022; downgraded in December 2021).
* Housing construction is “firm” (unchanged; upgraded in June 2022; downgraded in February 2022).
* Exports are “largely flat” (unchanged; upgraded in December 2020; downgraded in November 2021).
* Imports are “showing signs of a pickup” (unchanged; upgraded in July 2022; downgraded in May 2022).
* Industrial production is “showing signs of a pickup” vs. its pickup is “stalling” (the first upgrade in seven months; last upgraded in January 2022; downgraded in June 2022).
* Corporate profits are “picking up, although some weaknesses remain among non-manufacturers” due to the impact of the pandemic (unchanged; upgraded in March 2022; downgraded in April 2020).
* “Signs of a pickup in business sentiment are pausing” (unchanged; upgraded in December 2021; downgraded in March 2022).
* Employment conditions are “picking up” (unchanged; upgraded in July 2022; downgraded in May 2020).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).