By Max Sato
As part of its risk analysis, however, the government warned about China’s economic slowdown caused by the lingering impact of persistent Covid cases. China is both a major consumer market and a global production center.
In its December 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 also 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 latest meeting on Dec. 19-20, the BOJ’s policy board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the current cap of 0.25% amid upward pressures arising from aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime. Governor Haruhiko Kuroda told reporters on Tuesday that this adjustment should not considered a rate hike.
At the same time, the board voted unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases in order to support economic recovery from the pandemic-triggered slump and anchor inflation around its 2% price stability target.
For its part, the government said it will swiftly implement its “comprehensive economic measures for overcoming price increases and revitalizing the economy,” which was officially adopted in October 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 China for the first time in seven months, noting the latest resurgence in new Covid cases is slowing the pace of its economic recovery. It also downgraded its assessment of South Korea for the first time in three months, saying its economy is weakening. Last month, the government downgraded is views on the UK and Taiwan.
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 as well as (Covid) infection trends in China,” it said, adding the risk arising from China’s struggle to contain the spread of the pandemic with strict public health rules while trying to mitigate their impact on economic activity.
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 end deflation completely.
Key points from the monthly report:
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 continue to show personal expenditures on services, such as dining out, traveling and entertainment, is propping up overall consumption as the economy continues to reopen, while spending on goods remains largely flat. Domestic leisure travel bookings during the year-end and New Year holiday season are expected to surpass the numbers seen a year earlier.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Nov. 25 to Nov. 30 and released on Dec. 8, indicated that confidence has worsened. The seventh wave of the pandemic had eased by early September after the number of new inflections hit record highs from late July to late August, but Japan has now entered the eighth wave of the pandemic whose peak is projected to come around mid-January.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted its first monthly drop in four months, falling 1.8 points to a three-month low of 48.1 in November on a seasonally adjusted basis after rising 1.5 points to a four-month high of 49.9 in October. The index remained 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 third straight monthly drop, slipping 1.3 points to a four-month low of 45.1 in November after falling 2.8 points to 46.4 in October. 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 in October for the first time in eight months after the BOJ’s quarterly Tankan survey for September showed companies revised up their capex plans for fiscal 2022 ending next March.
In the latest Tankan survey for the December quarter, major firms slightly revised down their plans for business investment in equipment to a combined 19.2 percent year-on-year increase in fiscal 2022 ending next March, from a 21.5 percent gain projected in September. The pace is still high, compared to an 18.6 percent rise planned in June and a modest 2.2% rise projected in March and an estimated 2.3 percent drop for fiscal 2021. Smaller businesses reported their capex plans for fiscal 2022 would rise by a combined 3.8% from the previous fiscal year, revised up from a 1.3% rise planned in September and a 1.4 percent fall forecast in June.
The government downgraded its assessment of industrial production for the first time since June, reversing its latest upgrade in August and saying “the pickup in production is stalling.” Previously, it had said output was “showing signs of a pickup.”
Japan’s industrial production fell a sharper-than-expected 2.6% in October for the second straight monthly drop, hit by slowing global demand for production machines and electronic parts, and in payback for earlier gains on easing supply bottlenecks,
On the upside, the government upgraded its assessment of business confidence for the first time in 12 months, saying it is “showing signs of a pickup.” Until last month, it had said the pickup in business confidence was “stalling.”
The BOJ’s latest Tankan survey released last week showed confidence among major manufacturers in Japan drifted lower for the fourth straight quarter in December as credit tightening by major central banks and China’s zero-Covid policy have cooled off global demand while the Japanese government’s new travel discount program and eased Covid border control supported sentiment among service providers.
The government kept its view on exports after downgrading it in November 2021, saying they are “largely flat.” Shipments of automobiles are picking up while those of electric equipment and chemical products are drifting lower in the face of slowing global demand for smartphones and computers. Exports of semiconductor-producing equipment among other general machinery are flat.
The export volume index calculated by the Cabinet Office slumped a seasonally adjusted 2.0% on the month in November after rising 0.8% in October, edging up 0.2% in September and falling 3.3% in August.
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” (unchanged; upgraded in August 2022; downgraded in November 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 its pickup is stalling” vs. “showing signs of a pickup” (the first downgrade in six months; upgraded in August 2022; last 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).
* Business sentiment is “showing signs of a pickup” vs. “signs of a pickup are stalling” (the first upgrade in 12 months; last 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).