By Max Sato
It continued to warn that household spending is flat and real wages are falling amid elevated inflation, and that the impact of credit tightening in other major economies, China’s slow economic recovery and the war in the Middle East are posing downside risks to domestic growth and financial market stability.
In its November report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing in some areas.” It is the first downgrade since January, when it said the economy was “picking up moderately, although some weaknesses have been seen recently.”
The overall assessment was last upgraded in May for the first time in 10 months. Until April, the economy had been “picking up moderately, although some weaknesses are seen.”
The government believes there is still a risk of Japan falling back into deflation as
the current inflation above 3% in Japan has been caused by a spike in global energy and commodities prices and not backed by strong domestic demand or substantial wage growth.
It repeated 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 Oct. 30-31 meeting, the BOJ policy board decided in an 8-to-1 vote to make its seven-year-old yield curve control framework “more flexible” by calling its desired 1% upper end of the 10-year Japanese government bond (JGB) yield a “reference,” instead of a definite line that the bank had been trying to defend with market operations. It also discontinued the range for the long bond yield, which had been set between minus 0.5% and plus 0.5%.
The board also voted unanimously to maintain its basic monetary easing stance, keeping its long-term interest rate target officially “around zero percent” and the target for the overnight rate at minus 0.1%, with large asset purchases intact, in a decade-long campaign to achieve stable 2% inflation with sustainable wage growth.
Governor Kazuo Ueda told a post-meeting news conference on Oct. 31 that the decision to make the policy framework more flexible was partly due to an upward revision to the board’s inflation forecast but largely due to upward pressures on the JGB yields from overseas bond markets.
The summary of meeting showed board members stressed they need to closely monitor wage negotiations between major firms and their labor unions that take place in the early parts of next year as they set the tone for average wage hikes for fiscal 2024, and thus the key to achieving the bank’s stable 2% inflation target.
The government said it will support widespread wage hikes and robust business investment under Prime Minister Fumio Kishida’s “new capitalism” programs. It aims to guide firms from cost cuts, a common practice for survival that has been in place for 30 years, toward sharing profits with workers and investing more in growth areas. It has put together an economic stimulus package, with which it hopes to help businesses move toward investing in new growth areas from playing safe with cost cuts.
Using its “comprehensive” economic plans, the government will help “strengthen supply side that will powerfully promote change” and “improve people’s sense of well-being,” which should reduce sources of instability in the economy and tide over elevated costs for daily necessities.
The government is seeking an early approval of its supplementary budget for fiscal 2023 during the current 55-day extraordinary session of the Diet that is scheduled to end on Dec. 13.
As for overseas economies, the government maintained its overall assessment after upgrading it for the first time in 21 months in May, saying, “The world economy is picking up, although some regions are showing weakness.”
The government continues to see “recovery” in the U.S. economy and a “stalled pickup” in China. It upgraded its assessment of both South Korea and Taiwan for the first time in four months, saying there are “signs of a pickup.” It downgraded its view on the Eurozone for the first time in five months and on the UK for the first time in 12 months, saying both of them are in a “weak tone.”
Japan’s Economy to Stay on Recovery Track; Downside Risks Remain
On the near-term outlook for the Japanese economy, the government repeated its recovery outlook adopted in May, 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, repeating its concern over the challenges facing the world’s second largest economy arising from heavily indebted property developers.
“Also, full attention should be given to price increases, the situation in the Middle East and fluctuations in the financial and capital markets.”
The yen remains relatively weak, eroding Japan’s purchasing power, but the dollar has slipped to just above ¥147 amid easing U.S. bond yields after rising above ¥151, edging closer to a 32-year high of ¥151.94 hit in October last year, 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 business investment in equipment for the first time in 23 months, saying its pickup is “pausing.” Previously, it said business investment was “picking up.”
Japan’s gross domestic product for the July-September quarter posted its first contraction in three quarters, down 0.5% on quarter, or an annualized 2.1%, as private inventories plunged, net exports slipped after a sharp rebound in April-June, public works spending slowed, pent-up demand for eating out and traveling waned and firms turned cautious about capital investment, Cabinet Office data released last weekshowed.
Business investment fell 0.6% on quarter in July-September, which was weaker than the median forecast of a 0.1% rise and followed a 1.0% drop in April-June. Capex trimmed the GDP by 0.1 percentage point after providing a negative 0.2-point contribution the previous quarter.
Some firms remain cautious about implementing their plans amid elevated costs and uncertainty over global growth, although capital investment is generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.
The government maintained its assessment of private consumption, which accounts for about 55% of the gross domestic product, after upgrading it for the first time in 10 months in May, saying it is “picking up.”
Consumer spending on services remains solid as people have been eating out and traveling more freely since the government lifted many of its Covid restrictions in May. By contrast, expenditures on goods are lackluster as wage growth has not caught up with prices.
Consumer inflation in Tokyo, the leading indicator of the national average, unexpectedly accelerated to 2.7% in October in the core CPI (excluding fresh food) after slowing to a 14-month low of 2.5% in September as halved subsidies for electricity and natural gas utilities slowed the recent sharp drop in overall energy costs, offsetting the effects of smaller processed food markups, data from the Ministry of Internal Affairs and Communications released last month showed.
The national average CPI data for October, due on Friday, is forecast by economists to show the core CPI rose 3.0% on the year, led by peaking but still elevated prices for processed food and rising service costs, after easing to 2.8% in September from 3.1% in August.
Japan’s real household spending posted its seventh straight drop on the year in September, down 2.8%, slightly worse than a 2.5% dip in August, as high costs for daily necessities promoted many to be more frugal and the lingering heat wave damped demand for autumn clothing and other seasonal goods, data released earlier this month by the Ministry of Internal Affairs and Communications showed. On the month, expenditures edged up 0.3% after high demand for summer clothing triggered an above-forecast 3.9% rebound in August. Pent-up demand for eating out and traveling appears to have lost some steam.
The Bank of Japan’s supply-side consumption activity index fell a seasonally adjusted 0.9% on the month in September after edging up 0.1% each in the previous two months. The index rose 0.2% in the July-September period compared to the April-June quarter, when it dipped 0.7%. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government maintained its view on employment conditions after upgrading it for the first time in 11 months in June, saying they are “showing signs of improvement.”
Japanese payrolls posted their 14th straight rise on year in September as massive hiring by hotels, restaurants and builders continued mitigating a sharp decline in manufacturing jobs, while the unemployment rate edged down to 2.6%, as expected, after being unchanged in August, data released last month by the Ministry of Internal Affairs and Communications showed. The jobless rate is forecast to be unchanged at 2.6% in October’s data due on Dec. 1.
The pickup in nominal wages in Japan continued for nearly two years while real wages fell on the year for the 18th straight month, data released last month by the Ministry of Health, Labour and Welfare showed.
Total monthly average cash earnings per regular employee in Japan posted their 21st straight year-on-year rise, up a preliminary 1.2% in September, after rising 0.8% in August, 1.1% in July, 2.3% in June and 2.9% in May. The recent slower pace was due to a decline in bonuses and other special pay for the second straight month in September as well as no growth in overtime pay in July. In real terms, average wages fell a preliminary 2.4% on year in September for the 18th consecutive drop after falling 2.8%
The government maintained its assessment of exports after upgrading it for the first time in three months in August, saying they are “showing signs of a pickup.”
The index of export volumes fell a seasonally adjusted 1.0% on the month in October after rebounding 5.2% in September and slumping 5.9% in August, according to the Cabinet Office.
Japanese export values posted their second straight year-over-year increase in October, rising a stronger-than-expected 1.6% to the second highest amount on record on continued solid demand for automobiles, but shipments to the world slowed after climbing 4.3% to a record high in September as credit tightening by major central banks is dampening demand for electronic parts and devices, data released last week by the Ministry of Finance showed.
The BOJ’s real export index edged up 0.8% on the month in October after rising 4.4% on the month in September and slumping 6.1% in August. Shipments of automobiles and auto parts picked up further and those of information technology goods rebounded after recent drops. Shipments of intermediate goods fell and exports of capital goods slowed.
The government also maintained its assessment of industrial production after upgrading it for the first time in nine months in May, saying factory output “is showing signs of a pickup.”
Japan’s industrial production posted its first rise in three months in September, up 0.5% (revised up from a preliminary 0.2% rise), as output of automobiles returned to normal after a temporary shutdown at Toyota Motor’s domestic factories in late August, revised data released last week by the Ministry of Economy, Trade and Industry showed. The METI’s survey of producers conducted last month indicated that output is expected to rise 1.1% in October before falling 2.8% in November.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up” (unchanged; upgraded in May 2023; downgraded in February 2022).
* The pickup in business investment is “pausing” vs. business investment is “picking up” (the first downgrade in 23 months; upgraded in October 2022; last downgraded in December 2021).
* 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).
* Exports are “showing signs of a pickup” (unchanged; upgraded in August 2023; downgraded in January 2023).
* Imports are “largely flat” (unchanged; upgraded in April 2023; downgraded in January 2023).
* Industrial production is “showing signs of a pickup” (unchanged; upgraded in May 2023; downgraded in March 2023).
* Corporate profits are “improving as a whole” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving moderately as a whole” (unchanged; upgraded in October 2023; downgraded in March 2022). * The number