By Max Sato
In its June report, the government said the economy is “recovering at a moderate pace,” the same as in May. Until April, it had been “picking up moderately, although some weaknesses are seen.” Previously, the word ‘recovery’ was last used in February 2020, when the economy was recovering moderately, although the weakness, mostly in manufacturing, was becoming more apparent amid sluggish exports.
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, accompanied by wage increase.” It added the wage part last month in line with the bank’s April statement.
At its latest meeting on June 15-16, the bank’s policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
The bank repeated its April outlook that the domestic economy should recover modestly and inflation is expected to ease in fiscal 2023 ending next March after a spike in global energy and commodity markets led to a surge in consumer prices in fiscal 2022.
For its part, the government will support widespread wage hikes and robust business investment under Prime Minister Fumio Kishida’s “new capitalism” programs based on the basic policies for economic and fiscal management and reform 2023 approved by the cabinet on June 16.
The government plans to raise the average minimum wage for the 47 prefectures to at least Y1,000 this year from Y961 and provide fiscal support to money-losing small firms that are not paying business taxes. It will also extend unemployment benefits to those who quit work on their own to help them learn new skills, which it said should encourage people to shift to growth-oriented sectors.
The government will continue to “swiftly and steadily implement” its “comprehensive economic measures for overcoming price increases and revitalizing the economy,” which was officially adopted in October and is backed by a second supplementary budget for fiscal 2022 that ended in March, as well as the fiscal 2023 budget.
The government will 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. It will promote continuous investment through public-private sector partnership in “human resources, green (transformation) and economic security, which would easily be underinvested if simply left to market principles.”
The government revised up its view on India for the first time in 18 months, saying it is “recovering moderately,” but it noted the Eurozone economy is clearly “pausing,” the first downgrade in three months.
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 amid ongoing global monetary tightening and other factors,” the government warned, repeating its recent assessment.
“Also, full attention should be given to price increases and fluctuations in the financial and capital markets,” it said. In May, it left out “supply-side constraints” from the list of downside risks following their recent improvement.
Key points from the monthly report:
The government upgraded its view on employment conditions for the first time in 11 months, saying they are “showing signs of improvement,” instead of “picking up.”
Japanese workers at large firms are expected to receive an average 3.80% increase in total wages, a 30-year high, in fiscal 2023 that began on April 1, up from 2.14% in the initial estimate for fiscal 2022. Excluding seniority-based rises that are already in contracts, the average base wage hike is seen lower at 2.33%, which is still up from 0.50% for the previous year.
The government noted that 50.5% of about 2,000 respondents in a survey of small businesses conducted last month by the Japan Chamber of Commerce and Industry plan to raise wages by 3% or more in the current fiscal year.
Japanese payrolls posted their ninth straight year-on-year growth in April as the reopening of the economy boosted demand for consumer spending on services and manufacturing picked up, while the unemployment rate eased to 2.6% from 2.8% in March on fewer job cuts and quits, data released last month by the Ministry of Internal Affairs and Communications showed.
Total monthly average cash earnings per regular employee in Japan posted their 16th straight year-on-year rise, up 1.0% in April, after rising 1.3% in March, but in real terms, average wages slumped 3.0% on year in April after falling 2.3% the previous month, data released earlier this month by the Ministry of Health, Labour and Welfare showed.
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.”
New vehicle sales have been increasing on faster deliveries amid improving supply chains. More people are eating out in many regions and traveling more freely in the absence of strict public health rules and thanks to domestic travel subsidies. The government has widely eased Covid border control, prompting an influx of foreign visitors and supporting the tourism and retail sectors.
In its monthly report, the government 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 the third straight rise on the month in April, up 0.7% (revised up from an initial 0.4% drop), led by increases in general machines, electric equipment, electronic parts and devices and automobiles, revised data by the Ministry of Economy, Trade and Industry showed this week.
The METI changed the base year of the index of industrial production to 2020 from 2015, effective with revised April data. Under the new base year, the index stood at a five-month high of 105.5 in April. It is well above the recent bottom of 87.6 hit in May 2020 but below 108.8 seen in January 2020, when the pandemic hadn’t had a widespread impact yet. The index briefly jumped to 108.8 in April 2021, 109.0 in June 2021 and 107.8 in August 2022.
The government repeated that exports are “firm” after upgrading its view for the first time in 29 months in May. Previously, exporters were “in a weak tone.”
Japanese export values posted a slight gain in May as recovering supply chains supported automobile shipments to the U.S. and Europe but the pace of year-on-year increase continued slowing to 0.6% from 2.6% in April amid cooling global demand for semiconductors.
The BOJ’s real export index fell 3.5% on the month in May, giving up the gains of 2.7% in April and 0.8% in March, hit by declines in shipments of capital, intermediate and information technology goods. Exports of autos and auto parts continued recovering. On quarter, however, real exports in the first two months of the April-June period rebounded 1.5% after slumping 3.4% in January-March.
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).
* 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 “firm” (unchanged; upgraded in May 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 moderately as a whole” vs. “improving as a whole, although the pace has become moderate” (the first change in wording in three months; upgraded in March 2022; downgraded in March 2023).
* Business sentiment is “showing signs of a pickup” (unchanged; upgraded in December 2022; 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” vs. “picking up” (the first upgrade in 11 months; last upgraded in July 2022; downgraded in May 2020).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).