By Max Sato
In its monthly report released Thursday by the Cabinet Office, the government downgraded its view on the world economy only a month after upgrading it, blaming the lingering drag from China’s real-estate market problems.
The government continued to warn against downside risks from slower growth in other countries, “including the effects of continued high interest rate levels
in the U.S. and Europe and the lingering stagnation of the real estate market in China.” The Bank of Canada cut its policy rate for the second straight month on Wednesday, citing easing inflationary pressures and cooling economy, but the U.S. Federal Reserve remains cautious about starting a rate cut cycle.
The government also urged a close watch on inflation, the Middle East conflict and “fluctuations in the financial and capital markets” amid the protracted weakness of the yen that is keeping import costs high.
Last week, the International Monetary Fund maintained its global growth forecast at 3.2% for calendar 2024 in its update to the World Economic Outlook while lowering its GDP forecast for Japan to 0.7% from 0.9% projected in April and revising up Chinese growth to 5.0% from 4.6%.
The Japanese government has also revised down its own official GDP forecast to 0.9% for fiscal 2024 ending next March from 1.3% as consumers have turned more frugal amid elevated costs for food and other essentials and real wages continues falling from year-earlier levels. The latest forecast appears to be still too high given that the economy would have to grow 0.7% on quarter, or annualized 2.8%, in each quarter.
After marking its first slump in two quarters in January-March, Japan’s economy in April-June is expected to show modest growth of about 2% annualized as auto production resumed in March. However, more revelations of false safety test records in June, this time at Toyota Motor itself, instead of its subsidiaries, and at other automakers are expected to have slowed output.
In its July report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing.” Before its February downgrade, it had said the economy was “pausing in some areas.” It expects the economy “to continue recovering at a moderate pace with the improving employment and income situation, supported by the effects of the policies.”
“The government and the Bank of Japan will continue to work closely together to conduct flexible policy management in response to economic and price developments,” the government said, repeating its recent statements. It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, by conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”
The two parties “will completely overcome deflation and help guide the economy move on to a new growth-oriented stage,” the government said, suggesting it is still concerned about the downside risk that inflation may fail to be backed by sustained wage hikes.
The BOJ board is expected to cautiously raise the overnight interest rate target, with its next move possibly in September but not in July. At its latest meeting on June 13-14, the nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0% to 0.1% for the second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March.
The yen remains weak against the dollar on expectations that the BOJ is likely to raise its short-term interest rate target only gradually from around zero amid tame services costs which are keeping underlying inflation below the bank’s 2% target, and on the fact that Japan’s growth potential is much lower than that for the U.S.
Earlier this month, the dollar hit a fresh 38-year high above ¥161.70 but it has eased to around ¥154 on reports of suspected stealth yen-buying invention on July 11 and 12 by the Ministry of Finance, which appeared to have taken advantage of the U.S. CPI data for June that showed easing inflation. The data prompted some dollar selling on the notion that the Federal Reserve may lower interest rates in September.
As for overseas economies, the government downgraded its overall assessment for the first time in 18 months, only a month after upgrading it for the first time in 13 months. “The world economy is picking up, although it is pausing in some regions.” Last month, it simply said the world economy was “picking up,” leaving out the latter part of its May report that “some regions are showing weakness.”
The government downgraded its view on the Chinese economy for the first time in 11 months, saying, “The economy is pausing even though there is an increase in supply thanks to the effects of policy measures.” Previously, it said the economy was “showing signs of a pickup thanks to the effects of policy measures.”
It continues to say the U.S. economy is “expanding” while noting the Eurozone is “picking up” after upgrading its view on the region for the first time in 33 months last month.
Key points from the monthly report:
The government downgraded its assessment of exports for the first time in six months, saying they are “largely flat.” Previously it said the pick up in exports was “pausing.” The index of export volumes rose a seasonally adjusted 2.1%on the month in June after falling 4.2% in May and rising 0.8% in April, according to the Cabinet Office.
Japanese export values rose 5.4% for the seventh straight year-over-year increase in June, led by solid demand for semiconductor-making equipment, non-ferrous metals and plastics, but the pace of increase slowed from 13.5% in May and export volumes marked the fifth consecutive drop as the effects of the past rate hikes by major central banks weighed on global growth, data released last week by the Ministry of Finance showed.
Shipments to China, a key export market for Japanese goods, posted their seventh straight increase thanks to recovering demand for chip-making equipment and non-ferrous metals amid a gradual pickup in the world’s second-largest economy. Japanese exports to the European Union fell on year for the third straight month, hit by lower demand for automobiles and steel as seen in the prior month. Exports to the U.S. remain robust, up for the 33rd straight month on autos and auto parts, after hitting a record high amount in December 2023.
The government maintained its assessment of industrial production after upgrading it for the first time in 12 months in May, saying factory output “is showing signs of a pickup.”
Japan’s industrial production rebounded a seasonally adjusted 3.6% (revised up from a 2.8% rise) on the month in May after falling a downwardly revised 0.9% in April, thanks to emerging positive effects of vehicle output that was resumed in March after being suspended for about two months over safety issues. The increase was also led by electric machinery including lighting fixtures and navigation systems for vehicles as well as by general machinery such as conveyors and turbines.
From a year earlier, factory output posted the first increase in seven months, up 1.1% (revised up from a 0.3% rise), following a downwardly revised 1.8% slump in the prior month, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is expected to slip back 6.0% in June, led by lower output of production machinery and vehicles, before rising 3.6% in July on a rebound in production machinery and a rise in chemicals. The tentative consensus forecast for June production, due on Wednesday, July 31, is a 5.0% pullback on the month.
The government also maintained its assessment of private consumption, which accounts for about 55% of the gross domestic product, saying the pickup in consumption is “stalling.”
Weekly alternative data quoted by the Cabinet Office showed consumption has been increasing since late June and the Economy Watchers’ Survey conducted in late June indicated a slight pickup in sentiment.
Real household spending unexpectedly slumped 1.8% on the year in May, well below the consensus call of a 0.2% rise, as consumers slashed purchases of fresh vegetables whose prices had soared on bad weather while the weaker yen discouraged many people from booking overseas package tours, data released this month by the Ministry of Internal Affairs and Communications showed. The decrease, which followed a 0.5% rise in April for the first gain in 14 months, was also due to lower electricity bills paid in May after the northern region had mild weather in April.
On the upside, households spent more on new passenger cars and second-hand vehicles, the latter of which is gaining more traction among frugal consumers. Resumed production and shipments at Toyota group firms in March led to smoother deliveries of vehicles, but sales data have shown a decline in small vehicles, which are the main models impacted by two months of output suspension over safety issues.
The BOJ’s supply-side consumption activity index was unchanged on the month in May on a seasonally adjusted basis after rising 1.0% in April and falling 1.0% in March. The index rose 0.8% in the April-May period compared to the January-March quarter, when it dipped 0.8% on quarter. Figures exclude inbound tourism consumption but include outbound tourism spending.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* The pickup in private consumption is “stalling” (unchanged; upgraded in May 2023; downgraded in February 2024).
* Business investment is “showing signs of a pickup” (unchanged; upgraded in March 2024; downgraded in November 2023).
* Housing construction is “in a weak tone” (unchanged; upgraded in June 2022; downgraded in September 2023).
* Public investment is “solid” vs. “firm” (the first upgrade in two months; last upgraded in May 2024; downgraded in June 2024).
* Exports are “largely flat” vs. the pickup in exports is “stalling” (the first downgrade in six months; upgraded in August 2023; last downgraded in January 2024).
* Imports are “largely flat” (unchanged: upgraded in May 2024; downgraded in March 2024).
* Industrial production is “showing signs of a pickup” (unchanged; upgraded in May 2024; downgraded in February 2024).
* Corporate profits are “improving as a whole” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving” vs. “improving but some manufacturers are affected by the suspension of production and shipment by some automakers” (phrase changed; upgraded in December 2023; downgraded in March 2022).
* The number of bankruptcies “has been rising” (unchanged; upgraded in March 2021; downgraded in April 2023).
* Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
* Domestic corporate goods prices “have been rising at a moderate pace” (unchanged; last changed in May 2024).
* Consumer prices “have been rising at a moderate pace” (unchanged: upgraded in May 2022; downgraded in March 2020).