By Max Sato
Japanese policymakers expect robust consumption during full-scale summer festivals in July and August that are taking place without Covid restrictions. They are also counting on the auto, food tourism industries to lead overall sentiment higher, and foresee sluggish global demand for semiconductors to bottom out by the end of fiscal 2023 ending next March.
In its July report, the government said the economy is “recovering at a moderate pace,” the same as in the previous two months after upgrading it for the first time in 10 months 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.”
At the same time, the board will continue debating the costs and benefits of the yield curve control policy framework that was adopted in September 2016 and the negative overnight interest rate target introduced in January 2016.
The board is likely to repeat its recent statement that “the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions.”
Last week, Governor Kazuo Ueda told reporters in India after the Group of 20 meetings of finance ministers and central bank governors that the BOJ “has continued with monetary easing patiently while paying attention to financial intermediary and market functions based on the recognition that there is still some distance before achieving sustainable and stable 2 percent inflation.”
“I must say that unless the presumption (that there is some time before 2 percent inflation is achieved) is changed, the overall story will remain unchanged,” he said.
In its quarterly Outlook Report due Friday, the board is expected to revise up its median forecast for consumer inflation to between 2% and 3% in the core CPI (excluding fresh food) for fiscal 2023 from 1.8% projected in April while making little change to its projections of 2.0% for fiscal 2024 and 1.6% for fiscal 2025 amid uncertainty over global growth and domestic wage hikes in the next fiscal year starting in April 2024.
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 in June.
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 South Korea for the first time in two months, saying it is “showing signs of a pickup.” It also upgraded its assessment of Taiwan’s economy for the first time in 26 months, noting it is “showing signs of an end to the downturn.”
Japanese policymakers continued to see the U.S. economy is “recovering moderately” while growth in the Eurozone is “stalling.”
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. The dollar-yen exchange rate has fluctuated widely in the past month from a high of around ¥145 to the dollar and a low of just below ¥138 as market speculation about a shift in the BOJ’s policy stance toward tightening fueled yen buying at one point.
Key points from the monthly report:
The government upgraded its assessment of business sentiment for the first time in seven months, saying it is “picking up.” Until last month, it had said, it was “showing signs of a pickup.”
Confidence among major manufacturers in Japan picked up more than expected in June, posting the first rise in seven quarters, led by the auto industry amid improved supply chains, while the government’s travel discount program and eased Covid border control continued lifting sentiment among service providers, particularly hotels and restaurants, the Bank of Japan’s quarterly Tankan business survey for June released earlier this month showed.
Looking ahead, manufacturers are optimistic about their near-term business conditions but non-manufacturers project a slip in their sentiment for September.
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.
Regular wages among full-time workers have been rising steadily in the current fiscal year that began in April and are expected to rise further as more firms will reflect the results of spring labor-management negotiations. Summer bonuses are up further after a sharp gain last year and firms are raising hourly wages to secure workers.
Japanese workers at large firms are receiving an average 3.80% increase in total wages, a 30-year high, in fiscal 2023, 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 lower at 2.33%, which is still up from 0.50% for the previous year.
Japanese payrolls posted their 10th straight year-over-year growth in May as the reopening of the economy has boosted consumer spending on services while the unemployment rate was unchanged at 2.6% as job cuts and quits steadied, data released last month by the Ministry of Internal Affairs and Communications 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 continue to pickup thanks to improving supply chains while spending on eating out has largely recovered to the pre-pandemic level.
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 its first drop in four months in May, down 2.2% (revised down from a preliminary 1.6% drop), as automobile output was hit by parts shortages again after a recent recovery on better supply chains while slower global demand for equipment and chemicals also dented overall output, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is expected to mark a solid rebound on the month in June before falling back slightly in July.
The government repeated that exports are “firm” after upgrading its view for the first time in 29 months in May.
Japanese export values posted a modest rise on the year in June as recovering supply chains supported automobile shipments to the U.S. and Europe but volumes continued to shrink on sluggish global demand for semiconductors and iron and steel, data released last week by the Ministry of Finance showed.
The BOJ’s real export index rose 5.4% on the month in June, after falling 3.5% in May and rising 2.7% in April, led by a sharp rebound in shipments of capital goods as well as solid gains in intermediate and information technology goods. Exports of autos and auto parts continued recovering. On quarter, real exports in the April-June period rebounded 2.7% 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 solid” vs. “has been firm” (the first upgrade in 11 months; last 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” (unchanged; upgraded in June 2023; downgraded in March 2023).
* Business sentiment is “picking up” vs. “showing signs of a pickup” (the first upgrade in seven months; last 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” (unchanged; upgraded in June 2023; downgraded in May 2020).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).