By Max Sato
(MaceNews) – Japanese sentiment picked up slightly in July, thanks to a four-day weekend created for the Tokyo Olympics, but the uncertainty over the economic outlook grew amid a surge in cases caused by the more infectious Delta variant and public frustration over the government’s response to the pandemic, including the slow vaccination rollout.
Prime Minister Yoshihide Suga continued to see his cabinet’s approval ratings slide. Many people opposed Japan’s decision to go ahead with the pandemic-delayed 2020 Tokyo Olympics from July 23 to Aug. 8, saying the government is favoring commercial and political interests over public safety.
On the monetary policy front, the Bank of Japan’s eight-year effort to reflate consumer prices from slight drops to its ever-elusive 2% target is back to square one as the government switched the CPI base year to 2020 from 2015 and updated the weighting of surveyed goods and services.
The major revision to CPI is conducted every five years to correct for
statistical upward drift and reflect the latest consumer spending patterns. The updated CPI formula shows significant downward revisions for recent months.
Current Sentiment Up But Outlook Uncertain
The latest monthly Economy Watchers Survey conducted by the Cabinet Office and closely monitored by BOJ and government policy-makers showed sentiment remained mixed, with solid spending on goods in tune with stay-home lifestyles and sluggish sales at restaurants and bars as well as in the apparel industry.
The Watchers’ sentiment index for Japan’s current economic climate posted the second month-on-month rise in July, up a slight 0.8 point at 48.4 on a seasonally adjusted basis, after rebounding 9.5 points to 47.6 in June, the Cabinet Office said Tuesday.
The operator of an amusement park in the Tohoku region in the north attributed a rare year-on-year increase in revenue last month to good weather during the July 22-25 weekend while a convenience store in northern Kanto region, north of Tokyo, said high temperatures pushed up beverage sales and more customers bought large quantities of food and drinks for watching the Olympic games at home.
But some respondents noted Japan’s relatively slow vaccination pace, compared to a much higher rate of fully inoculated populations in other major economies, has led to cancellations of many events and slow employment recovery in the face-to-face service sector.
New COVID-19 cases surged from July 25 to July 31, when the Watchers survey was conducted, with new daily cases topping 10,000 in Japan. The fifth wave of the pandemic since April last year forced the government to expand the areas of strict restrictions from Tokyo and Okinawa to three prefectures around the capital as well as Osaka, a western commercial hub, effective until Aug. 31.
Looking ahead, the Watchers outlook index, which shows sentiment about the situation two to three months ahead, marked the first monthly drop in three months, down 4.0 points at 48.4 in July, after rising 4.8 points to 52.4 the previous month.
Some respondents continued to pin hopes on the positive effect of vaccination, but others suspected more waves of infections could hit Japan, making it hard to foresee when the government can ease restrictions. The survey also showed the outlook for global semiconductor supplies remained uncertain.
Consumer Confidence, Inflation Outlook Flat
Last week, the Cabinet Office reported that its Consumer Confidence Survey of households with two or more people, which was conducted July 15, showed that sentiment improved for the second straight month, but only slightly.
The Consumer Confidence index edged up by just 0.1 point to 37.5 in July on a seasonally adjusted basis after rising 3.3 points to 37.4 in June.
The Cabinet Office maintained its assessment that consumer sentiment showed “a move toward picking up continues, although conditions remain severe.” It revised up its view the previous month from its earlier statement that “the pace of picking up has slowed.”
Consumers were more optimistic about three of the four key aspects that affect their sentiment – overall economic well-being, income gains, job prospects – while they were more pessimistic as to whether it would be a good time to buy durable goods over the next six months.
The index on asset prices, which is not one of the sub-indexes used to
calculate overall consumer confidence, fell 1.2 points to 40.2 in July, showing the first drop in three months after rising 1.6 point in June and being flat in May, in line with weaker Japanese stock markets between mid-June and mid-July.
The survey also showed that for the first time in two months, fewer people thought prices for daily necessities would rise a year from now and fewer respondents also believed prices would fall. More people expected prices to be unchanged.
CPI Downward Revisions Under 2020 Base Year
The government’s bid to improve the accuracy of its CPI data showed the gradual pickup in consumer prices, led by the energy market recovery, has been replaced by price drops.
On Friday the government said the latest update to its CPI formula has resulted in fairly large downward revisions in recent months from the figures calculated on the previous base year and weighting.
The core consumer price index, which excludes fresh food but includes energy prices, slumped 0.5% on year in June, revised down from a 0.2% rise as reported last month.
Under the new formula, the negative contribution of mobile communications fees increased as their weighting rose after major carriers introduced new plans at a large discount in April under constant pressure from the government. The lower weighting of gasoline against the overall CPI basket led to a slight drop in its positive contribution. A higher weighting of city water raised its share of pushing up prices.
The year-on-year change in the core reading was revised down to -0.6% in May from +0.1% while it was -0.9% in April under the new formula, down sharply from -0.1%. The downward revision was smaller for March at -0.3%, compared to -0.1% under the previous formula. The revisions to the first two months of 2021 were limited to a negative 0.1 percentage point.
Five years ago, the base-year change from 2015 from 2010 resulted in only slight revisions (some are upward, others downward) or no changes from the figures base on the previous base year and weighting.
In the past, the revision led to a 0.6 of a percentage point downgrade of CPI in the re-weighting in 2011, and negatively affected CPI by 0.4 point, 0.2 point and 0.1 point in the previous 5-year updates.