By Max Sato
In its February report, the government said the economy is “picking up moderately, although some weaknesses have been seen recently.” The weakness part was added last month, marking the first downgrade since February 2022, when a renewed spike in coronavirus cases sparked by the Omicron variant hurt consumer spending.
Last week, official data showed that Japan’s gross domestic product for the October-December quarter posted a smaller-than-expected 0.2% rebound on quarter, or an annualized 0.6% rise, as eased Covid rules and travel subsidies supported consumption while net exports rose after a one-time surge in service imports caused an unexpected contraction in July-September GDP. The weaker-than-expected growth came largely from a bigger-than-expected reduction in private sector inventories and an anticipated slowdown in public works spending.
The government 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.” The bank is expected to maintain its easing stance for now until it conducts a review of 10 years of large-scale monetary easing under Governor Haruhiko Kuroda, who is set to retire on April 8 at the end of his second five-year term.
The government has nominated economics professor Kazuo Ueda, 71, as BOJ governor, plus candidates for the two deputy governors. The new BOJ leadership will be formally appointed by the cabinet of Prime Minister Fumio Kishida after it is approved by both chambers of parliament.
The move is seen as prompting a gradual departure from the decade-old reflationary Abenomics policy mix without giving too much of a shock to investors and borrowers. Kishida has been cautious about whether the government and the BOJ should review their 2013 policy coordination accord. The then-prime minister Shinzo Abe demanded that the central bank adopt a clear 2% inflation target, instead of trying to achieve a stable 1% price increase in the long term.
Ueda served on the BOJ’s nine-member policy board from 1998 until 2005 under the revised Bank of Japan Act that called for more transparency in the decision-making process and independence from political influence. Ueda told reporters on Feb. 10 that the current Bank of Japan policy is “appropriate” and that it is “necessary to continue monetary easing under the current circumstances.”
His comments made market participants believe that there would be no drastic shift in the bank’s policy stance, leading the yen to slip back after its recent rebound. There were expectations that the central bank will consider changing its yield curve control policy framework to allow long-term interest rates to rise in line with economic recovery, as the new governor takes office.
For the two deputies, the government has nominated Shinichi Uchida, one of the six BOJ executive directors supporting the governor, and Ryozo Himino, a former Ministry of Finance official, reports said. Uchida, 60, is a career central banker with years of experience in crafting unorthodox monetary easing tools. Himino, 62, served as the commissioner of the government watchdog Financial Services Agency from 2020 to 2021. The five-year terms of the current deputy governors end on March 19.
In its monthly report, the government repeated that it will swiftly implement its “comprehensive economic measures for overcoming price increases and revitalizing the economy,” which was officially adopted in October and will be backed by a second supplementary budget for fiscal 2022. It will also support “structural wage increases” – a cycle under which subsidized wage hikes would attract highly skilled workers and boost productivity, which in turn should lead to higher wages.
By country, the government revised down its view on Thailand for the first time in 17 months, noting the economic pickup is stalling. It also downgraded its assessment of Germany for the first time in four months, saying its economy is at a standstill.
On the near-term outlook for the Japanese economy, the government repeated its recent view, saying, “The pickup in the economy is expected to continue under the new normal, supported by the effects of the policies.”
“However, slowing down of overseas economies is a downside risk to the Japanese economy amid ongoing global monetary tightening and other factors” the government warned, repeating its recent assessment. “Also, full attention should be given to price increases, supply-side constraints and fluctuations in the financial and capital markets as well as the spread of infectious diseases in China.”
Key points from the monthly report:
The government maintained its assessment of exports after downgrading it for the first time in 14 months in January, saying they are “in a weak tone.” Previously, it had said they were “largely flat.”
Growth in Japanese export values slowed to a single-digit percentage rise in January amid slowing global demand and suspended shipments during the Lunar New Year holidays in some parts of Asia, leading to a record high trade deficit, data released last week by the Ministry of Finance showed.
The export volume index calculated by the Cabinet Office dropped a seasonally adjusted 3.0% on the month in January after plunging 5.2% in December, falling 2.0% in November and rising 0.9% in October.
After an upgrade in July last year, the government has maintained its assessment on private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up moderately.”
Consumer spending on goods has been solid while expenditures on services have been supported by the government’s domestic travel discount program, which was launched in October and resumed in January on a smaller scale after a brief suspension during the yearend and new year holidays.
But many households continued to face high food prices and utility bills as well as a slow pace of wage hikes compared to surging inflation.
Consumer inflation in Japan accelerated in December, with the core measure setting a 41-year high of 4.0%, as more firms raised prices for a wide range of food and beverages and city gas providers continued passing high energy and import costs on to users. The CPI data for January due Friday is forecast to show the core CPI (excluding fresh food) will set a fresh 41-year high of 4.3%.
The government noted that producer inflation in Japan eased in January as energy and commodity markets had turned softer on slowing global demand and an earlier rebound in the yen helped lower import costs, but the annual rate just under 10% indicates firms are still trying to pass the past year’s sharp cost rises.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Jan. 25 to Jan. 31 and released on Feb. 8, indicated that confidence remained weak in January, hit by severe winter weather and rising costs, but the outlook was more positive on expectations that the pandemic will ease in a few months after a recent spike and that firms will raise wages for fiscal 2023.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted its third straight drop, falling 0.2 point to a five-month low of 48.5 in January on a seasonally adjusted basis after slipping 0.7 point to 48.7 in December and slumping 1.4 points to 49.4 in November. The index has remained under the key 50 line for the third straight month. It is well below the 16-year high of 58.3 hit in December 2021.
By contrast, the Watchers’ outlook index, which shows sentiment in two to three months, marked its second consecutive increase, jumping 2.5 points to 49.3 in January after rebounding 0.5 point to 46.5 in December and slipping 0.8 point to 46.3 in November.
Total monthly average cash earnings per regular employee in Japan posted their 12th straight year-on-year rise, up a preliminary 4.8% on year on winter bonuses and a higher regular pay, after rising 1.9% in November. In real terms, average wages edged up a preliminary 0.1% on year for the first gain in nine months after falling 2.5%.
In its monthly report, the government maintained its assessment of industrial production after downgrading it December, saying “the pickup in production is stalling.”
Japan’s industrial production was nearly flat in December on cooling global demand, but down by a smaller-than-expected 0.1%, after an upwardly revised slight gain in November and a slump in October, as lower output of general machines was partly offset by the recent recovery in the auto sector amid easing supply constraints, preliminary data released last month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is likely to decline further in January and rebound in February.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up moderately” (unchanged; upgraded in July 2022; downgraded in February 2022).
* Business investment is “picking up” (unchanged; upgraded in October 2022; downgraded in December 2021).
* Housing construction is “firm” (unchanged; upgraded in June 2022; downgraded in February 2022).
* Public investment “has been firm” (unchanged; upgraded in August 2022; downgraded in November 2021).
* Exports are “in a weak tone” (unchanged; upgraded in December 2020; downgraded in January 2023).
* Imports are “in a weak tone” (unchanged; upgraded in July 2022; downgraded in January 2023).
* Industrial production is “showing its pickup is stalling” (unchanged; upgraded in August 2022; downgraded in December 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).
* Business sentiment is “showing signs of a pickup” (unchanged; upgraded in December 2022; downgraded in March 2022).
* The number of bankruptcies “has been rising, although it is at a low level” (unchanged; upgraded in March 2021; downgraded in January 2023).
* Employment conditions are “picking up” (unchanged; upgraded in July 2022; downgraded in May 2020).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).