–Govt Still Warns About Downside Risks from Chinese Slowdown, Inflation, Mideast Conflict, January Earthquake
By Max Sato
It followed its first downgrade of its view in three months last month and the Bank of Japan’s first rate hike in 17 years this week.
At the same time, the government didn’t lower its guard against lingering downside risks from Chinese slowdown, the Middle East conflict, inflation 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 March 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, dropping 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.”
“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, sounding slightly more positive than before but failing to clearly declare that deflation is over.
At its March 18-19 meeting, the Bank of Japan’s nine-member board decided to end its seven-year-old yield curve control framework and lift the minus 0.1% overnight interest rate target to a range of zero to 0.1% from minus 0.1%, its first rate hike in 17 years.
Many board members believe that the risk of Japan’s economy slipping back into deflation has been reduced and inflation is likely to be led by sustained wage hikes, instead of a spike in import costs, following news last week that wage hikes for fiscal 2024 that begins next month are set to well surpass the pace of increase seen in the previous year.
The first estimate by the Japanese Trade Union Confederation (Rengo) released last week showed that the median wage hike at its 771 member firms is 5.28%, a 33-year high, accelerating from its initial estimate of 3.80% seen a year earlier, which was later revised down to 3.58%. Rengo figures tend to be revised down later but the data appeared to have given more confidence to most BOJ board members who have wanted to confirm clearer signs of wage hikes before shifting policy.
Governor Kazuo Ueda told a post-meeting news conference that the pace of further rate hikes as part of the bank’s policy normalization process is likely to be gradual. The accommodative financial environment will continue as long as the BOJ’s policy interest rate stays below the level that is considered neutral to economic activity, he said.
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 regards the U.S. economy as “expanding” after upgrading its view last month while it continued to see “a stalled pickup” in China and “a weak tone” in the Eurozone. It upgraded its view on India, saying it is “recovering,” instead of “recovering gradually.”
Japan’s Economy Expected to Stay on Recovery Track but Downside 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 yen remains weak, compared to ¥132 a year ago, keeping Japan’s purchasing power low through high import costs. The currency has depreciated to around ¥151.80 after firming to ¥147 earlier this month on expectations that the BOJ wouldn’t wait until April to hike rates. Investors are seeking higher returns from holding U.S. dollar assets on the outlook that the pace of the BOJ’s further rate hikes will be only gradual and the Federal Reserve is cautious about embarking on a rate cut cycle.
Finance Minister Shunichi Suzuki warned against one-sided yen selling this week, repeating that the government is watching the currency market “with a high sense of urgency.” The dollar is flirting with its 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 upgraded its assessment of business investment for the first time in 17 months, saying it is “showing signs of a pickup.” Until last month, it said the pickup in business investment was “pausing.”
The economy narrowly averted a second straight quarterly drop in October-December, and thus recession last year, as revised data for gross domestic product showed a slight 0.1% rise on the quarter, or an annualized 0.4%, backed by a decent but slightly smaller-than-expected upward revision to business investment and an unrevised rebound in net exports, offsetting the drag from declines in consumption and public works. In the GDP data, capex jumped 2.0% on quarter in October-December, a large upward revision from the initial reading of a 0.1% slip, after falling in the previous two quarters.
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 “pausing,” it said.
Real household spending posted its 11th straight drop on the year in January, down a worse-than-expected 6.3%, the largest drop in nearly three years and following a 2.5% in December, as consumers remain frugal amid high costs and car purchases slipped in the wake of suspended vehicle output over a safety test scandal, data released this month by the Ministry of Internal Affairs and Communications showed.
Consumers are seeking lower prices for goods and services including prevalent discount mobile phone plans while the Covid-era necessity has simplified ceremonies and lowered their costs. But the sharp drop in overall spending in January was also due to temporary factors. People spent less on tours as the government’s economic stimulus measure to subsidize domestic travel that began in October 2022 wound down toward the end of 2023. Mild winter weather also led to lower spending on utilities.
Many households continue to see 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 just over two years in January but real wages fell on the year for nearly two years.
The Bank of Japan’s supply-side consumption activity index rose a seasonally adjusted 0.3% on the month in January after plunging 1.5% in December and edging up 0.1% in November. The index dipped 0.6% in January compared to the October-December quarter, when it fell 1.2%. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government also maintained its assessment of industrial production after downgrading it for the first time in 11 months in February, 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.”
Industrial production plunged 6.7% (revised up from 7.5%) on the month in January, hit by suspended vehicle output over a safety test scandal and in payback for recent gains in other sectors, after rebounding a downwardly revised 1.4 percent in December and falling 0.9 percent in November, revised data released this week by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated production is expected to rise 0.8% on the month in February and increase a further 2.0% in March. The median economist forecast for February is a partial 1.0% rebound. Economists expect factory output to continue picking up from the January plunge as the direct impact of the auto industry problem and the earthquake wanes.
The government maintained its assessment of exports, saying their “pickup is pausing.”
The index of export volumes slumped a seasonally adjusted 4.7% on the month in January after rebounding 7.7% in December and falling 5.6% in November, according to the Cabinet Office. The BOJ’s real export index also fell 4.0% on the month in February for a second straight drop after dipping 4.8% in January and rebounding 7.7% in December.
The government downgraded its view on imports for the first time in 14 months, saying they are “weakening.” Previously, it had said imports were “largely flat.”
Japanese export values rose 7.8% on year in February for the third straight increase, led by continued strong demand for automobiles and auto parts from the U.S. and Europe as well as semiconductor-producing equipment and plastics from Asia, data released Thursday by the Ministry of Finance showed. The pace of increase decelerated from a 11.9% rise in January due to the lunar new year holidays in some parts of Asia after rush pre-holiday shipments in January.
Import values posted the first year-over-year increase in 11 months, up just 0.5%, after falling a revised 9.8% in January. The increase was led by purchases of clothing, computers and refined petroleum products. Imports of coal and liquefied natural gas continued to fall on soft energy prices. Those of semiconductors from China also declined.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* The pickup in private consumption is “pausing” (unchanged; upgraded in May 2023; downgraded in February 2024).
* Business investment is “showing signs of a pickup” vs. the pickup in business investment is “pausing” (the first upgrade in 17 months; last 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 “weakening” vs. “largely flat” (the first downgrade in 14 months; upgraded in April 2023; last 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.” (unchanged; 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” (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).