By Max Sato
The dollar remains strong against many currencies but the yen has recovered some ground in the past few weeks after the Ministry of Finance conducted massive foreign exchange intervention to sell the U.S. currency for yen. Investors also believe that the Federal Reserve may not have to tighten so aggressively after the October U.S. CPI data showed signs of slight easing in upward pressures on consumer prices.
Japan spent more than Y9 trillion (about $65 billion) in its latest campaign to slow the pace of the yen’s slide, using its foreign reserves worth Y6.35 trillion in October and Y2.838 trillion on Sept. 22, MOF data showed.
In its November report, the government said the economy is “picking up moderately.” It has been using this expression since it upgraded its 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 2% in a sustainable and stable manner.”
At its last meeting on Oct. 27-28, the BOJ’s policy board decided unanimously to maintain its zero to slightly negative interest rate targets along the yield curve and large asset purchases, as expected, to support full economic recovery and anchor inflation around its 2% price stability target.
The government will implement its “comprehensive economic measures for overcoming price increases and revitalizing the economy,” which was officially adopted late last month and will be backed by a second supplementary budget for fiscal 2022. It will also support “structural wage increases” – a cycle under which subsidized wage hikes would attract highly skilled workers and boost productivity, which in turn should lead to higher wages.
In the short term, the government will provide fiscal support to lower electricity charges to many households early next year. In the long run, it will finance projects to boost domestic production of food, feed crops, semiconductors and batteries for electric cars and energy storage, which is aimed at reducing Japan’s heavy dependence on imports of those strategically important goods.
By country, the government revised down its view on the UK economy for the first time in two months, saying it has stalled after showing signs of a pickup. It also downgraded its assessment of Taiwan for the first time in two months, noting its economic recovery is losing steam.
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 under the new normal, supported by the effects of the policies.”
“However, slowing down of overseas economies is a downside risk to the Japanese economy amid ongoing global monetary tightening and other factors” the government warned, repeating its assessment from last month. “Also, full attention should be given to price increases, supply-side constraints and fluctuations in the financial and capital markets.”
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 move out of deflation completely.
Consumer inflation in Japan soared in October as many more firms, hit by high producer and import costs amid the weak yen, jacked up retail prices for food, beverages, electronic appliances and tobacco, boosting the annual increase in the core CPI (excluding fresh food) to a more than 40-year high of 3.6%. The difference between now and then is that the current spike in prices is mostly due to elevated energy and commodities costs aggravated by the weak yen, and that service prices are being flat, meaning wage hikes have been muted and average real wages have been falling.
Key points from the monthly report:
The government has downplayed the first GDP contraction in four quarters, saying the 0.3% drop, or an annualized 1.2% slump, in July-September was caused by a surge in imports led by high costs, easing supply bottlenecks and a temporary jump in service payments, which together dampened the effects of export growth as well as resilient business investment and consumer spending.
After an upgrade in July, the government has maintained its assessment on private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up moderately.”
Credit card records show spending on services, such as dining out, traveling and entertainment, are propping up overall consumption as the economy continues to reopen, while spending on goods is flat. On the downside, rising prices are squeezing real household incomes, hurting consumer sentiment.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Oct. 25 to Oct. 31 and released on Nov. 9, indicated that confidence has picked up slightly but the outlook remains uncertain as the eighth wave of the pandemic is emerging in Japan.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted the third straight monthly rise on a seasonally adjusted basis, up 1.5 points at a four-month high of 49.9 in October, after gains of 2.9 points in September and 1.7 points in August and a 9.1-point drive to a five-month low of 43.8 in July. The index remained just under the key 50 line after slipping into the territory in July for the first time since April and stayed well below the 16-year high of 57.5 hit in December 2021.
The Watchers’ outlook index, which shows sentiment in two to three months, marked the second straight monthly drop, down 2.8 points at 46.4 in October, after edging down 0.2 point to 49.2 in September and rebounding 6.6 points to 49.4 in August and falling 4.8 points to a six-month low of 42.8 in July. January’s 7.8-point decline to 42.5 was the lowest since 36.9 in December 2020.
In its monthly report, the government maintained its view on business investment in equipment, which is “picking up.” It was upgraded last month for the first time in eight months after the BOJ’s quarterly Tankan survey showed companies revised up their capex plans for fiscal 2022 ending next March.
Some capex plans are being carried over from fiscal 2021, when the economy was hit by the previous wintertime spike in Covid cases and supply delays were exacerbated by the Ukraine war. Capex is supported by demand for automation, government-led digital transformation and emission control.
The government maintained its assessment of industrial production after upgrading it in August for the first time in seven months, saying it is “showing signs of a pickup.” Previously it had said “its pickup is stalling.”
The government kept its view on exports, saying they are “largely flat.” Shipments of autos and production machines are growing while those of electric equipment and chemical products are on a downtrend in the face of slowing global demand for smartphones and computers.
Japanese exports values hit another record high in October as easing supply bottlenecks continued supporting the auto industry and the prices for fuels and semiconductors remained high, but high energy bills and the weak yen also lifted imports to a fresh all-time high, leading to a 15th consecutive month of a trade deficit.
The export volume index calculated by the Cabinet Office rose a seasonally adjusted 0.8% on the month in October after rising 0.2% in September and falling a 3.3% in August for the first drop in four months.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up moderately” (unchanged; upgraded in July 2022; downgraded in February 2022).
* Business investment is “picking up” (unchanged; upgraded in October 2022; downgraded in December 2021).
* Housing construction is “firm” (unchanged; upgraded in June 2022; downgraded in February 2022).
* Public investment “has been firm” vs. “has turned firmer” (the first downgrade in 13 months; upgraded in August 2022; last downgraded in October 2021).
* Exports are “largely flat” (unchanged; upgraded in December 2020; downgraded in November 2021).
* Imports are “largely flat” (unchanged; upgraded in July 2022; downgraded in October 2022).
* Industrial production is “showing signs of a pickup” (unchanged; upgraded in August 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).