By Max Sato
In its January report, the government said the economy is “picking up moderately,” using the same expression since it upgraded its view in July last year, but also added that “some weaknesses have been seen recently.” Altogether, it is the first downgrade since February 2022, when a renewed spike in coronavirus cases sparked by the Omicron variant hurt consumer spending
It also repeated its request first made in May 2022 that the Bank of Japan should “achieve the price stability target of 2% in a sustainable and stable manner.” The bank is expected to maintain its easing stance at least until the end of the second five-year term of Governor Haruhiko Kuroda in early April.
Prime Minister Fumio Kishida has been careful about mentioning whether the government and the BOJ should review its 10-year-old policy coordination accord under the new governor. Speculation of an abrupt end to the yield curve control framework, which was adopted in September 2016 and targets negative 0.1% in overnight interest rates and around zero in the 10-year bond yield, could spark a sharp rebound in the yen from the current too weak levels beyond what Japanese policymakers wish to see.
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 and natural gas charges to many households, starting this month. In the longer 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 second month in a row, noting the latest resurgence in new Covid cases is weakening the economy. It also downgraded its assessment of Taiwan for the first time in two months, saying its economy is weaker.
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. “Also, full attention should be given to price increases, supply-side constraints and fluctuations in the financial and capital markets as well as the spread of infectious diseases in China,” it said, noting the worsening Covid situation in China after Beijing lifted its strict zero-Covid public health rules.
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:
The government revised down its assessment of exports for the first time in 14 months, saying they are “in a weak tone.” Until last month, it had said they were “largely flat.”
Growth in Japanese export values lost steam further in December on slowing global demand as China struggles with a renewed spike in Covid infections and deaths, while lower energy markets and the yen’s slight rebound also reduced import values, leading to a narrower trade deficit, data released this month by the Ministry of Finance showed.
The export volume index calculated by the Cabinet Office plunged a seasonally adjusted 5.3% on the month in December after falling 2.0% in November and rising 0.9% in October.
The Bank of Japan’s real export index also slumped a seasonally adjusted 4.7% on the month in December after rising 0.1% in November and 1.4% in October. The decrease was led by a 10.1% drop in shipments of capital goods and a 4.4% dip in those of automobiles and auto parts after recent gains. Demand for computers, semiconductors and other information technology goods remained sluggish. The index rose just 0.7% on quarter in October-December after rising 3.0% in July-September after slumping 3.3% in April-June.
On the upside, the number of visitors from other countries has continued to pick up since the government eased its Covid border control rules in October, leading to higher spending by foreign visitors, which is counted as exports.
After an upgrade in July last year, 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 personal expenditures on both goods and services have been improving. More people traveled during the year-end and New Year holidays without strict public health restrictions for the first time in three years, pushing up transportation by air and train close to its pre-pandemic levels. Some people are still cautious about holding parties but spending on eating out in general has recovered to pre-pandemic levels.
But households are facing the headwind as the costs for daily necessities are rising and real wages are falling.
Consumer inflation in Japan accelerated in December, with the core measure setting a 41-year high of 4.0%, as more firms raised prices for a wide range of food and beverages and city gas providers continued passing high energy and import costs on to users, data from the Ministry of Internal Affairs and Communication released last week showed.
The yen has regained some ground against the dollar but remains relatively weak compared to its year-earlier levels, eroding Japan’s purchasing power and keeping the costs for importing materials and products high. The prices for food excluding perishables rose at its fastest pace in 46 years, having a bigger impact on inflation than energy in recent months.
Looking ahead, households will see some easing in elevated utility costs as the government will provide subsidies to consumer electricity and natural gas providers from January to September this year, which will be reflected in utility bills, and thus CPI data, in February onward.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Dec. 25 to Dec. 31 and released on Jan. 12, indicated that confidence was slow to recover. The numbers of Covid infections and deaths are surging again in Japan’s eighth wave of the pandemic.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted its second straight drop, falling 0.2 point to 47.9 in December on a seasonally adjusted basis after slumping 1.8 points to 48.1 in November for the first fall in four months. The index remains under the key 50 line after slipping into negative territory in July for the first time since April 2022 and has stayed well below the 16-year high of 57.5 hit in December 2021.
By contrast, the Watchers’ outlook index, which shows sentiment in two to three months, marked its first rise in four months, rising 1.9 points to 47.0 in December after slipping 1.3 points to a four-month low of 45.1 in November. The 7.8-point decline to 42.5 in January 2022 pushed the index to its lowest level since 36.9 in December 2020.
In its monthly report, the government maintained its assessment of industrial production after downgrading it last month, saying “the pickup in production is stalling.” Output of automobiles has picked up in line with easing supply constraints while demand for production machinery including semiconductor-producing equipment has slowed.
Japan’s industrial production posted a third straight monthly drop in November, down by a firmer-than-expected 0.1%, as global demand for electronic parts and devices, notably from China, continues to shrink and output of general machines dipped in reaction to higher demand the previous month, preliminary data released last month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is likely to decline further in December and January after supply constraints have eased in recent 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” (unchanged; upgraded in August 2022; downgraded in November 2021).
* Exports are “in a weak tone” vs. “largely flat” (the first downgrade in 14 months; upgraded in December 2020; last downgraded in November 2021).
* Imports are “in a weak tone” vs. “largely flat” (the first downgrade in three months; upgraded in July 2022; last downgraded in October 2022).
* Industrial production is “showing its pickup is stalling” (unchanged; upgraded in August 2022; downgraded in December 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” (unchanged; upgraded in December 2022; downgraded in March 2022).
* The number of bankruptcies “has been rising, although it is at a low level” vs. “nearly flat” (the first downgrade in 14 months; upgraded in March 2021; last downgraded in November 2021).
* 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).