By Max Sato
(MaceNews) – Japan’s government Tuesday upgraded its economic overview for the first time in three months in July as consumption is on a clearer pickup path, led by job creation and pent-up demand, but real wages are falling amid rising inflation and the weaker yen is eroding purchasing power, according to its monthly report released by the Cabinet Office.
The government also added financial market gyrations amid credit tightening by many central banks to the list of downside risks to a steady recovery from the pandemic-triggered slump.
In its July report, the government said the economy is “picking up moderately,” an upward revision from its previous statement that the economy was “showing signs of a pickup.”
It repeated its request first made in May that the Bank of Japan should “achieve the price stability target of two percent in a sustainable and stable manner.” The government noted that the BOJ has maintained its easing stance to support smaller businesses and ensure financial market stability during the pandemic.
The Bank of Japan on Thursday decided to maintain its super-low interest rate targets along the yield curve and large asset purchases, as expected, to help the economy recover to pre-pandemic levels and anchor inflation around its stable 2% target.
As for overseas economies, the government repeated that they are “picking up while stalling in some areas,” an assessment downgraded in May for the first time in 25 months due to Chinese slowdown. This month, it upgraded its view on the Chinese economy for the first time in four months as Beijing lifted its two-month lockdown of Shanghai, the trading hub, at the end of May.
At the same time, the government downgraded its view on Taiwan’s economic recovery for the first time in 26 months while also noting a slower pace of pickup in Germany, its first downgrade in 19 months.
On Japan’s near-term outlook, the government repeated its recent view, saying, “The pickup in the economy is expected to continue, supported by the effects of the policies and economic and social activities are moving toward normalization.”
“However, full attention should be given to the downside risks due to fluctuations in the financial and capital markets amid global monetary tightening, rising raw material prices and supply-side constraints,” the government warned, highlighting the risk posed by the recent sharp depreciation of the yen and unstable stock markets.
Based on its policy mix of large-scale monetary easing, flexible fiscal spending and growth strategies aimed at promoting private investment, the government will implement “flexible macroeconomic policy measures without hesitation” to achieve autonomous growth led by private demand and completely end deflation.
Amid rising costs for daily necessities and slow wage recovery, the government vowed to “work seamlessly to take swift and comprehensive measures tailored to the situation, while making flexible use of reserve funds (in the fiscal 2022 budget).”
Key points from the monthly report:
The government revised up its assessment on private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up moderately,” compared to its previous view that it was “showing signs of a pickup. It was the first upgrade in three months.
People have been spending more on eating out and traveling since the government eased public health restrictions in late March while shopping more at department stores for high-end goods and clothing as the economy is reopening and more people have resumed commuting to work.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from June 25 to June 30 and released on July 8 indicated that surging costs of energy and food are dampening sentiment after recent improvement, and the recent spike in new Covid cases across Japan could slow the pace of the economic pickup.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted the first drop in four months, down 1.1 points at 52.9 in July on a seasonally adjusted basis, after rising 3.6 points to 54.0 in May. It is above the key 50 line but well below the 16-year high of 57.5 hit in December 2021 (the highest since 57.7 in December 2005).
The Watchers’ outlook index, which shows sentiment in two to three months, marked the first drop in five months, falling 4.9 points to 47.6 in July, after rising 2.2 points to 53.5 in May. January’s 7.8-point decline to 42.5 was the lowest since 36.9 in December 2020.
In its monthly report, the government revised up its assessment on employment conditions for the first time in two months, saying they are “picking up,” compared to its previous view that they were “showing signs of a pickup.” The number of employed posted the second straight year-on-year rise in May while that of unemployed fell for the 11th straight month. Jobs data for June due Friday is expected to show further improvement.
The government maintained its assessment of exports as being “largely flat” after downgrading it in November last year. Shipments to the US and Europe are showing signs of a pickup while those to Asia are flat.
The export volume index calculated by the Cabinet Office posted the second straight monthly rise in June, up a seasonally adjusted 1.6% after rising 1.8% in May after falling 3.1% in April.
Solid reopening demand for mineral fuels, iron and steel and semiconductors led Japanese export values to a record high in June while shipments to China marked the first rise in three months after a two-month Covid lockdown of the key port city of Shanghai was lifted at the end of May, data released Thursday by the Ministry of Finance showed.
But export volumes marked the fourth straight year-on-year decline amid uncertainty over whether aggressive interest rate hikes by some central banks can ease inflationary pressures without causing a recession.
The government maintained its assessment on production after downgrading it
In June for the first time in seven months, saying “its pickup is stalling.” Supply bottlenecks are limiting the production of vehicles. The growth in electronic devices output has been slowing due to recent Covid lockdowns in Chinese cities.
Japan’s industrial production slumped at a faster pace than expected in May from the previous month after a strong gain in production machinery in April and lower output of automobiles due to global semiconductor shortages, preliminary data released last month by the Ministry of Economy, Trade and Industry showed.
Based on its survey of manufacturers, METI projected that industrial production would rebound 9.1% on month in June and fall 1.4% in July. Adjusting the upward bias in output plans, METI forecast production would gain 5.4% in June. The Mace News median economist forecast is a smaller 3.7% rise in June (data due Friday) after a revised 7.5% drop in May.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up moderately” vs. “showing signs of a pickup” (the first upgrade in three months; last upgraded in April 2022; downgraded in February 2022).
* Business investment is “showing signs of a pickup” (unchanged; upgraded in February 2022; downgraded in December 2021).
* Housing construction is “firm” (unchanged; upgraded in June 2022; downgraded in February 2022).
* Exports are “largely flat” (unchanged; upgraded in December 2020; downgraded in November 2021).
* Imports are “showing signs of a pickup” vs. “largely flat” (the second straight upgrade; last upgraded in June 2022; downgraded in May 2022).
* The pick up in industrial production is “stalling” (unchanged; upgraded in January 2022; downgraded in June 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).
* “Signs of a pickup in business sentiment are pausing” (unchanged; upgraded in December 2021; downgraded in March 2022).
* Employment conditions are “picking up” vs. “showing signs of a pickup” (the first upgrade in two months; last upgraded in May 2022; downgraded in May 2020).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).