–Govt Notes Early Signs of Q2 Consumption Pickup, Spreading Wage Hikes
Japan Govt Keeps Its View on Economic Recovery, Downplaying Q1 GDP Slump as Mainly Caused by Temporary Vehicle Output Suspension
–Govt Still Warns About Downside Risks from Chinese Slowdown, Inflation, Mideast Conflict, January Earthquake
By Max Sato
In its monthly report released Monday by the Cabinet Office, the government also pointed to signs of a consumption rebound at the start of the April-June quarter and upgraded its view on industrial production now that Toyota and its subsidiary Daihatsu resumed production and shipments in March.
The second quarter outlook is shared by Bank of Japan Governor Kazuo Ueda, who also told reporters ahead of the Group of seven meeting of financial policymakers in Italy that “there is no change to the overall picture that an expected rise in nominal wages will raise real (household) income.”
At the same time, the government continued to warn against downside risks from Chinese slowdown, the Middle East conflict and inflation. It still mentioned the effects of the powerful New Year’s Day earthquake in the northwestern region of Hokuriku that had reduced electronic parts supply and battered tourism.
It urged a close watch on “fluctuations in the financial and capital markets.” The prolonged weakness of the yen as a risk factor was not singled out in the main section of the report but the government noted that it is raising import costs for businesses.
In its May report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing.” Before the February downgrade, it had said the economy was “pausing in some areas.”
“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 statement from March.
In March, the government briefly dropped its long-held request that the BOJ should “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increase.”
However, it revived its request in April and repeated it in May, saying, “The government expects the Bank of Japan to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, through conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”
“The government and the bank will foster widespread recognition among the public that there is no going back to deflation, and will bring deflation to an end,” the government said, repeating its March statement. It has not clearly declared that deflation is completely gone in Japan, although BOJ officials have said the economy has moved out of constant price drops.
In coming months, the BOJ board is expected to “cautiously” raise the overnight interest rate target gradually from the current range of zero to 0.1 percent after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March amid signs of a high pace of wage hikes among big businesses that could spread to more smaller firms than seen in the past.
After the board decided unanimously to hold the policy rate steady in late April, Governor Ueda told reporters that the depreciation of the yen at the time was having only a negligible impact on the bank’s perception of underlying inflation trend in Japan, which is still just below the bank’s 2% target when the effects of the primary price rises caused by a surge in import costs were excluded. His remarks were interrupted to mean that the bank would not conduct a further rate hike any time soon to help shore up the yen and ease the upward pressures on import costs.
BOJ officials have said they do not use monetary policy tools to try to influence foreign exchange rates but there are expectations that the BOJ may decide to reduce its purchases of Japanese government bonds (JGBs) from the current monthly pace of about ¥6 trillion at its June 13-14 meeting in hopes of keeping the yen from falling.
The yield on the 10-year JGB rose to a 12-year high of 1.005% on speculation that the BOJ may raise rates more frequently than previously believed. The move also reflects higher U.S. treasury yields.
The government continues to promise it will support widespread wage hikes and robust business investment. It will swiftly implement the supplementary budget for fiscal 2023 and the fiscal 2024 budget, and to compile its annual basic policies on economic and fiscal management and reform.
As for overseas economies, the government maintained its overall assessment after upgrading it for the first time in 21 months in May 2023, saying, “The world economy is picking up, although some regions are showing weakness.”
After upgrading its view on China last month, the government repeated that the world’s second-largest economy is “showing signs of a pickup thanks to the effects of policy measures.” This month, it raised its view on South Korea for the first time in six months, saying it is “picking up.” Taiwan’s economy is “recovering moderately,” its first upgrade in four months, but the pickup in the Thai economy is “stalling,” the first downgrade in 13 months.
The government continues to say the U.S. economy is “expanding” and that the Eurozone has “a weak tone.”
Japan’s Economy Expected to Stay on Recovery Track but Risks Remain
On the near-term outlook for the Japanese economy, the government repeated its recovery outlook adopted in May 2023, saying, “The economy is expected to continue recovering at a moderate pace with improving employment and income conditions, supported by the effects of the policies.”
“However, slowing down of overseas economies is a downside risk to the Japanese economy, including the effects of global monetary tightening and the concern about the prospect of the Chinese economy,” the government warned.
“Also, full attention should be given to price increases, the situation in the Middle East and fluctuations in the financial and capital markets,” it said, adding that it is also watching the economic impact of the earthquake.
The dollar surged to a 34-year high of just above ¥160 on April 29 on expectations that interest rates in Japan will remain low and a U.S. rate cut is unlikely for now, but suspected dollar-selling intervention by the Ministry of Finance pushed the U.S. currency below ¥155. The MOF is also believed to have stepped into the forex market on May 2, when the dollar dipped to around ¥153 from ¥157. The Japanese government is estimated to have bought a total of ¥9 trillion on those two days.
Since then, the dollar has risen to around ¥157 on the notion that the Federal Reserve may not lower interest rates this year if the U.S. economy remains resilient and inflation eases only gradually.
Previously, the dollar briefly surged to a 32-year high of ¥151.94 in October 2022 but Japan’s second wave of massive yen-buying forex intervention pushed it down to a low of ¥143.55 in the same month.
Key points from the monthly report:
The government raised its assessment of industrial production for the first time in 12 months, saying factory output “is showing signs of a pickup, although it has declined due to the effects of suspension of production and shipment by some automakers.” Previously, it had said production “was on its way toward a pickup but has declined recently due to the effects of suspension of production and shipment by some automakers.”
In the preliminary April data due on May 31, industrial production is forecast by economists to post a second straight rise on the month, up 1.6%, after an upwardly revised 4.4% jump in March, thanks to resumed auto output after about months of suspension through February at Toyota group firms. From a year earlier, factory output is expected to post a sixth straight drop (a 10th in the past 12 months), down 1.2%, with the pace of decline easing from an upwardly revised 6.2% slump in the prior month.
The Ministry of Economy, Trade and Industry survey of producers released last month indicated that output is expected to slip back 1.0% in April before a solid 4.4% rebound in May.
The government maintained its assessment of exports, saying their “pickup is pausing.” The index of export volumes rose a seasonally adjusted 0.8% on the month in April after rebounding 3.3% in March and slumping 4.2% in February, according to the Cabinet Office.
Japanese export values rose 8.3% on year in April for the fifth straight increase, led by solid global demand for automobiles and Asian purchases of semiconductors while export volumes continued falling, data released last week by the Ministry of Finance showed. The pace of increase was slower than the consensus forecast of a 11.1% gain but accelerated from the 7.3% rise in March.
Shipments to China, a key export market for Japanese goods, posted their fifth straight increase in April after a year-long decline through November last year amid a gradual recovery in the Chinese economy. Japanese exports to the European Union showed the first drop in five months but exports to the U.S. remain robust, up for the 31st straight month, after hitting a record high amount in December 2023.
The government maintained its assessment of private consumption, which accounts for about 55% of the gross domestic product, after downgrading it for the first time in two years in February. The pickup in consumption is “stalling,” it said.
Real household spending fell a smaller-than-expected 1.2% on year in March after a 0.5% slip in February (down a sharper 2.7% without the leap-year effect) as consumers remain cautious amid elevated costs for food and other necessities, but it was partly offset by a rebound in automobile purchases thanks to resumed vehicle production, data released this month by the Ministry of Internal Affairs and Communications showed. The median forecast was a deeper 2.3% drop.
People continued spending more on eating out, but higher spending on automobiles in March may not necessarily be a welcome sign for the outlook for consumer spending. Compared to a year earlier, the number of vehicles purchased was about the same but their prices were higher. The ministry could not determine whether consumers are shifting toward higher-end models or high material costs are boosting vehicle prices. In addition, some parents had to send more money to their children studying away from home.
The BOJ’s supply-side consumption activity index fell a seasonally adjusted 0.6% on the month in March after rising 1.5% in February and slipping 0.7% in January. The index dipped 0.5% in the January-March period compared to the October-December quarter, when it fell 1.1% on quarter. Figures exclude inbound tourism consumption but include outbound tourism spending.
At the start of the second quarter, however, the government noted that some April data indicated an uptick in consumer spending: The gradual resumption of shipments by automakers led to a rebound in new car sales while above-average temperatures for the season spurred early sales of air conditioners. In addition, it said, sales of mobile phones, which had seen a decline in January, picked up in April.
Also on the upside, big data from payroll outsourcing services highlights a substantial increase in wages, particularly among younger workers, the government said. There is also a significant wage growth for workers in their 40s, who had seen stagnant wages in previous years, it said. The widespread wage increases are a result of this year’s spring wage negotiations, which have hit the highest growth in 33 years. Firms are also raising starting salaries and at publicly traded companies, the average summer bonus amount is set to increase 4.6% on year.
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 10 months; last upgraded in July 2023; downgraded in October 2023).
* The pickup in exports is “stalling” (unchanged; upgraded in August 2023; downgraded in January 2024).
* Imports are “largely flat” vs. “weakening” (the first upgrade in 13 months; last upgraded in April 2023; downgraded in March 2024).
* Industrial production “is showing signs of a pickup, although it has declined due to the effects of suspension of production and shipment by some automakers” vs. “was on its way toward a pickup but has declined recently due to the effects of suspension of production and shipment by some automakers.” (the first upgrade in 12 months; last upgraded in May 2023; downgraded in February 2024).
* Corporate profits are “improving as a whole” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving but some manufacturers are affected by the suspension of production and shipment by some automakers” (unchanged; 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” vs. are “being flat” (the first change in description in eight months).
* Consumer prices “have been rising at a moderate pace” (unchanged: upgraded in May 2022; downgraded in March 2020).