–Japan’s Economy still Faces Downside Risks from Chinese Slowdown, High Prices, January’s Earthquake
By Max Sato
The economy continues to face downside risks from Chinese slowdown, the Middle East conflict, high prices and the effects of the powerful New Year’s Day earthquake in the northwestern region of Hokuriku that has reduced electronic parts supply and battered tourism.
In its February report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing.” Previously, it had said the economy seemed to be “pausing in some areas.” It is the first downgrade since November, when it revised down its view for the first time since January 2023.
The government said Japan still needs monetary and fiscal stimulus and growth strategies to keep itself from falling back into deflation, repeating 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, accompanied by wage increase.”
At its previous meeting on Jan. 22-23, the BOJ policy board voted unanimously to maintain its seven-year-old yield curve control framework and retain its guidance that it will “patiently continue with monetary easing” in order to “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
In a decade-long pursuit of stable 2% inflation, the board decided in a unanimous vote to keep the targets of minus 0.1% for the short-term policy rate and “around zero percent” for the 10-year bond yield, the latter of which has a flexible 1% upper limit after having been adjusted twice last year in the face of ripple effects of higher U.S. bond yields.
At the same time, bank officials have been debating an eventual exit from large-scale monetary easing. Many board members have argued they should wait until the spring (from March to May) to confirm whether annual labor talks would lead to a substantial wage hike for the second fiscal year in a row before considering
lifting the negative short-term interest rate target or ending the yield curve control framework.
The board is expected to stand pat at its March 18-19 meeting but is likely to consider taking the first step toward unwinding large-scale stimulus at its April 25-26 meeting, when it releases the quarterly Outlook Report to provide its latest medium-term growth and inflation forecasts plus risk analysis.
In the last report in January, the bank said underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise. “The likelihood of realizing this outlook has continued to gradually rise, although there remain high uncertainties over future developments.”
For its part, the government continues to promise it will support widespread wage hikes and robust business investment. It will swiftly implement its supplementary budget for fiscal 2023 and seek parliamentary approval of the fiscal 2024 budget before the next fiscal year starts on April 1. It will also use reserves to rebuild the quake-hit region.
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.”
The government upgraded its view on the U.S. economy for the first time in six months, saying it is “expanding,” instead of “recovering,” while it continued to see “a stalled pickup” in China and “a weak tone” in the Eurozone.
Japan’s Economy Expected to Stay on Recovery Track
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 magnitude 7.6 earthquake jolted the Sea of Japan coast areas in Ishikawa Prefecture, killing more than 240 people (the number is rising), most of them crushed under their collapsing homes, and causing damage to more than 70,000 houses. Eight weeks after the quake, about 1,100 households remain without electricity, more than 23,000 are without water supply and over 12,000 people are still in evacuation.
The yen remains weak at around ¥150 compared to ¥134 a year ago, keeping Japan’s purchasing power low. Expectations of early and frequent interest rate cuts by the Federal Reserve have waned while uncertainty remains over when the BOJ starts raising rates in the aftermath of the earthquake and second consecutive contraction in GDP in the last quarter of 2023.
Earlier, the dollar rose above ¥151 in November 2023, edging closer to a 32-year high of ¥151.94 hit in October 2022, when Japan’s second wave of massive yen-buying forex intervention pushed the U.S. currency down to a low of ¥143.55 in the same month.
Key points from the monthly report:
The government downgraded its assessment of private consumption, which accounts for about 55% of the gross domestic product, for the fist time in two years. It now says the pickup in consumption is “pausing.” Until last month, it said consumption was “picking up,” the phrase had maintained since upgrading its view in May 2023.
Real household spending posted its 10th straight drop on the year in December, down a deeper-than-expected 2.5%, following a 2.9% dip in November, as consumers continued to be selective in purchases amid high costs for daily necessities and after a cold snap triggered rush purchases of winter clothing and heaters in the previous month, data released this month by the Ministry of Internal Affairs and Communications showed.
On the month, expenditures fell a worse-than-expected 0.9% for the third drop in a row for a third consecutive decline, after slumping by 1.0% in November, which was also weaker than forecast.
People continued eating out in the absence of strict Covid rules and spending on vehicles and pre-holiday car maintenance rose after a pullback in November. The start of the flu season pushed up spending on medical services including hospitalization. But these factors were not strong enough to offset the impact of the widespread move among consumers to switch to discount mobile phone plans and the pandemic-era necessity to simplify weddings and funerals.
Many households have seen their spending power eroded by inflation. Data from the Ministry of Health, Labour and Welfare showed the pickup in nominal wages in Japan continued for two years in December but real wages fell on the year for the 21st straight month.
The Bank of Japan’s supply-side consumption activity index fell a seasonally adjusted 2.0% on the month in December after edging up 0.4% in November. The index slipped 1.2% in the October-December period compared to July-September, when it rose 1.0%. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government also downgraded its assessment of industrial production for the first time in 11 months, saying factory output “was on its way toward a pickup, but has declined recently due to the effects of suspension of production and shipment by some automotive manufacturers.” Previously, it said production was “showing signs of a pickup.”
Industrial production rebounded by a smaller-than-expected 1.4% on the month in December (revised down from 1.8%), led by demand for conveyors, cosmetics and semiconductor-producing equipment and recovering from a 0.9% drop in November, revised data released last week by the Ministry of Economy, Trade and Industry showed.
However, the METI’s survey of producers indicated that output is expected to plunge 10.5% in January before rising a modest 2.2% in February. The downturn is due to suspension of all domestic production by Toyota Motor group firm Daihatsu over a vehicle safety scandal from late December until mid-February, which appears to be having a widespread impact beyond the auto industry. To make matters worse, Toyota said on Jan. 29 that it would suspend shipments of 10 models after its supplier Toyota Industries admitted to cheating on engine testing.
The government maintained its assessment of exports after downgrading it for the first time in 12 months last month, saying their “pickup is pausing.”
The index of export volumes rebounded a seasonally adjusted 7.7% on the month in December after falling 5.6% in November for the second straight drop after falling 1.1% in October and rebounding 5.2% in September, according to the Cabinet Office.
Similarly, the BOJ’s real export index bounced back 7.7% on the month in December after falling 5.8% in November and rising 1.0% in October. The index
rose 0.2% on quarter in the October-December period after a 0.6% gain in July-September, a 2.4% rebound in April-June and a 3.3% dip in January-March. The slight increase in Q4 was led by second straight rises in shipments of capital and information technology goods, which were partly offset by a pullback in both intermediate goods and the autos and auto parts category.
Japanese export values rose 11.9% on year in January, as largely expected, after rebounding a revised 9.7 percent to a record high in December, led by shipments of automobiles, auto parts and semiconductor-producing equipment, data released Wednesday by the Ministry of Finance showed.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* The pickup in private consumption is “pausing” vs. consumption is “picking up” (the first downgrade in 24 months; upgraded in May 2023; last downgraded in February 2022).
* The pickup in business investment is “pausing” (unchanged; upgraded in October 2022; downgraded in November 2023).
* Housing construction is “in a weak tone” (unchanged; upgraded in June 2022; downgraded in September 2023).
* Public investment is “firm” (unchanged; upgraded in July 2023; downgraded in October 2023).
* The pickup in exports is “pausing” (unchanged; upgraded in August 2023; downgraded in January 2024).
* Imports are “largely flat” (unchanged; upgraded in April 2023; downgraded in January 2023).
* Industrial production “was on its way toward a pickup but has declined recently due to the effects of suspension of production and shipment by some automotive manufacturers.” vs. “showing signs of a pickup” (the first downgrade in 11 months; upgraded in May 2023; last downgraded in March 2023).
* Corporate profits are “improving as a whole” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving” (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 are “being flat” (unchanged).
* Consumer prices “have been rising at a moderate pace” (upgraded in May 2022; downgraded in March 2020).