By Max Sato
In its September report, the government said the economy is “recovering at a moderate pace,” the same as in the previous three months, after upgrading it for the first time in 10 months in May. Until April, the economy had been “picking up moderately, although some weaknesses are seen.”
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.”
Governor Kazuo Ueda told a post-meeting news conference that the bank’s policymakers “cannot possibly pre-determine the timing of policy change or specific responses,” reminding that it may take some more time before clear indications for continued substantial wage hikes and stable 2% inflation emerge. He repeated that Japan’s growth and inflation outlook remains highly uncertain.
Ueda also said the risk of under-easing is still greater than over-easing because Japan has experienced years of deflation and low inflation.
At its previous meeting in July, the board decided in an eight to one vote to make the bank’s existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations. The July vote on the overall easing stance was unanimous.
By providing “greater flexibility” to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
The government will try to mitigate the impact of a recent surge in the prices of gasoline and other fuels and limit increases in electricity and gas utilities costs by extending its existing subsidies that were originally scheduled to end this month through the end of the year.
It also plans to compile “comprehensive economic measures” by the end of October, which should help households better cope with the elevated cost of living, support structural wage hikes among small businesses and economic growth in rural areas, promote domestic investment that raises growth potential, and lead “social transformation” to overcome the drag from the shrinking population.
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.”
Last month, the government upgraded its view on the U.S. economy for the first time in three months while downgrading its assessment of the Chinese economy for the first time in seven months.
Japan’s Economy to Stay on Recovery Track; Slow Chinese Growth Remains Risk
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 and signs of deflation.
“Also, full attention should be given to price increases and fluctuations in the financial and capital markets,” it said, repeating its recent statement. The yen remains weak, with the dollar climbing toward ¥149. The dollar is 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 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.” It noted that consumer inflation remains high, just above 3%, due to elevated costs for food and rising services prices, and that consumer sentiment among lower income households has been slow to recover.
Demand-side data shows selective spending by cautious households amid elevated costs while demand-side data points to resilient consumption.
Japan’s real household spending posted its fifth straight drop on the year in July, down 5.0%, as high costs for food and other daily necessities have made consumers more frugal while spending more on dining out and traveling in the absence of strict Covid public health rules, data released earlier this month by the Ministry of Internal Affairs and Communications showed.
Many households had already purchased electric appliances and furniture in an earlier phase of the pandemic when they spent more time at home. People have also trimmed spending on face masks and fever thermometers after the government lifted many Covid public health restrictions in May.
The Bank of Japan’s supply-side Consumption Activity Index rebounded a seasonally adjusted 0.6% on the month in July after falling 0.6% in June and rising 0.7% in May. The index slipped 0.5% in July compared to the April-June quarter, when it dipped 0.5%. 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.” Companies that have been able to pass higher import and production costs onto customers are raising wages at a higher pace than seen in recent years.
Japanese payrolls posted their 12th straight growth on year in July as hospitals, hotels, restaurants, factories and construction firms continued to fill job vacancies as the economy continues reopening while the unemployment rate unexpectedly climbed to 2.7% from 2.5% in June as job cuts rose and more people began looking for work, data released last month by the Ministry of Internal Affairs and Communications showed. The jobless rate is forecast to improve slightly to 2.6% in August in Friday’s data. Job cuts are believed to have steadied and fewer people appeared to have begun looking for work.
The latest data from the Ministry of Health, Labour and Welfare showed that total monthly average cash earnings per regular employee in Japan posted their 19th straight year-on-year rise, up 1.3% in July, after rising 2.3% in June. But in real terms, average wages slumped 2.5% on year in July after slipping 1.6% in June.
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 6.7% on the month in August after rising 3.5% in July and 3.3% in June and falling 2.0% in May, according to the Cabinet Office.
Japanese export values posted a smaller-than-expected drop in August after marking their first year-over-year decline in 29 months in July amid sluggish demand for chip-making equipment, although automobile shipments stayed on recovery track on improved supply chains and solid U.S. and European demand, data released last week by the Ministry of Finance showed.
The BOJ’s real export index fell 6.1% on the month in August after rising 1.4% in July and 5.2% in June. The decrease was led by a pullback in shipments of capital goods after a sharp rebound in June and a modest gain in July as well as a drop in exports of information technology goods. Exports of autos and auto parts posted a slight second consecutive fall following strong gains earlier this year.
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 slipped back on the month in July, down XXX% 1.8% (revised from a preliminary 2.0% drop), after rebounding 2.4% in June, hit by weaker global and domestic demand for semiconductor-producing equipment and despite continued recovery in the auto industry, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers conducted last month indicated that output is expected to dip further in August, down 1.4%, before posting a 2.4% rebound in September. The median economist forecast for August output, due on Sept. 29, is a smaller 0.8% pullback.
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 “in a weak tone” vs. “largely flat” (the second straight downgrade; upgraded in June 2022; last downgraded in August 2023).
* Public investment “has been solid” vs. “has been firm” (unchanged; upgraded in July 2023; downgraded in November 2021).
* 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” vs. “improving moderately as a whole” (the first upgrade in 18 months; last upgraded in March 2022; downgraded in March 2023).
* Business sentiment is “picking up” (unchanged; upgraded in July 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” vs. “falling moderately” (the first change of wording in three months).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).