By Max Sato
In its March report, the government said the economy is “picking up moderately, although some weaknesses are seen.” The latter part was added in January, when the overview was downgraded for the first time in 11 months.
The government 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’s policy board under the new governor, Kazuo Ueda, is expected to maintain its monetary easing stance, for now, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to guide inflation toward the stable 2% target with sustained wage growth. Ueda’s five-year term will begin on April 9. He is the first academic to lead the BOJ’s policy board in the bank’s modern history.
For its part, the government will “further accelerate the implementation” of its “comprehensive economic measures for overcoming price increases and revitalizing the economy,” which was officially adopted in October and is backed by a second supplementary budget for fiscal 2022 ending this month. 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.
The government revised up its view on China for the first time in seven months, saying it is showing signs of a pickup while some areas of the economy have weak spots. At the same time, it downgraded its assessment of the Eurozone economy for the first time in five months, saying its pickup is at a standstill, compared to its previous view that it was picking up gradually.
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 recent assessment. “Also, full attention should be given to price increases, supply-side constraints and fluctuations in the financial and capital markets.” It left out the drag from the spread of Covid in China.
Key points from the monthly report:
The government maintained its assessment on private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up moderately.” Consumption is resilient, led by pent-up demand for services, despite sluggish spending on goods.
Real average household spending posted a slight 0.3% drop on the year in January, with more people switching to discount mobile communications plans amid rising costs for food and utilities, but the pace of decline slowed from a 1.3% dip in December as the economy continued reopening amid the eighth wave of the pandemic. On the month, spending rebounded a seasonally adjusted 2.7% in December after falling 1.4% in December.
Some people continued traveling and eating out more freely, taking advantage of the government’s discount program launched in October and resumed in January after a brief suspension during the yearend and new year holidays, while others remained cautious about stepping out.
Consumer prices in Tokyo, the leading indicator of the national average, posted year-on-year gains of above 3% in February in two key measures, slowing significantly from four-decade highs of over 4% in January, thanks to the government’s new program to provide subsidies to consumer electricity and natural gas suppliers.
The national average CPI data for February due Friday is forecast to how the core CPI (excluding fresh food) rose 3.1% on year, decelerating from a 4.2% surge in January, with processed food and durable goods prices seen leading the increase.
The government noted that producer inflation in Japan continued to ease to 8.2% on year in February from 9.5% in January and a 42-year high of 10.5% in December, as the government is trying to cap sharp increases in energy costs for both households and businesses while fuel and lumber prices fell at a faster pace amid slowing global demand.
Looking ahead, domestic demand is likely to be supported by consumer spending on goods and services as the economy continues to reopen, but the purchasing power of many households has been reduced by rising costs for daily necessities and falling real wages.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Feb. 25 to Feb. 28 and released March 8, indicated that confidence picked up sharply in February as the economy continued reopening and anti-Covid public health rules were scheduled to be eased further in March. The outlook was mixed, however, as some firms found it hard to fully pass higher producer costs onto customers.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted its first monthly rise in four months, surging 3.5 points to an eight-month high of 52.0 in February, on a seasonally adjusted basis, from a five-month low of 48.5 in January. The index popped above the key 50 line for the first time since it rose to 50.8 in October, but it is still below the 16-year high of 58.3 hit in December 2021.
The Watchers’ outlook index, which shows sentiment in two to three months, marked its third consecutive increase, rising 1.5 points to a nine-month high of 50.8 in February after jumping 2.5 points to 49.3 in January.
Total monthly average cash earnings per regular employee in Japan posted their 13th straight year-on-year rise, but the pace of increase slowed to 0.8%, after surging a revised 4.1% in December on winter bonus payments and rising 1.9% in November. In real terms, average wages slumped 4.1% on year after edging down 0.6% in December and falling 2.5% in November.
In its monthly report, the government downgraded its assessment of industrial production for the first time in three months, saying, factory output “has been in a weak tone recently.” Previously, it had said, “The pickup in production is stalling.”
Industrial production fell at a faster pace than forecast in January, down 5.3% on the month (revised down from an initial 4.6% drop) after December’s upwardly revised slight 0.3% gain, as automakers suffered parts shortages and many other industries were hit by weaker global and domestic demand, revised data released last week by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated last month that output was likely to post modest gains in February and March, but the ministry said that would not be strong enough to offset the sharp drop in January.
The government downgraded its view on corporate profits for the first time in 35 months, saying they are “improving as a whole, although the pace has become moderate.” Previously it said profits were “picking up, although some weaknesses remain among non-manufacturers” due to the impact of the pandemic.
The government maintained its assessment of exports after downgrading it in January, saying they are “in a weak tone.” Previously, it had said they were “largely flat.”
Japanese export values posted only modest growth in February amid slowing global demand but picked up from January, when lunar new year holidays distorted trade flows with some parts of Asia, data released last week by the Ministry of Finance showed. The pace of imports was also relatively slow on softer energy markets, which led to a narrower trade deficit in February after the balance hit a record shortfall in January.
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” (unchanged; upgraded in December 2020; downgraded in January 2023).
* Imports are “in a weak tone” (unchanged; upgraded in July 2022; downgraded in January 2023).
* Industrial production “has been in a weak tone recently” vs. “is showing its pickup is stalling” (the first downgrade in three months; upgraded in August 2022; last downgraded in December 2022).
* Corporate profits are “improving as a whole, although the pace has become moderate” vs. “picking up, although some weaknesses remain among non-manufacturers” due to the impact of the pandemic (the first downgrade in 35 months; upgraded in March 2022; last 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” (unchanged; upgraded in March 2021; downgraded in January 2023).
* 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).