–Exports Show ‘Signs of Picking Up’
By Max Sato
In its August 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.”
At the same time, 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.
By providing “greater flexibility,” the bank 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.
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 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.”
Japan Upgrades View on US Economy, Downgrades China
The government upgraded its view on the U.S. economy for the first time in three months, saying it is “recovering,” instead of “recovering moderately,” while downgrading its assessment of the Chinese economy for the first time in seven months, noting that “its pickup is showing signs of pausing,” compared to the previous statement that it was “showing signs of a pickup.”
Japanese policymakers continued to see the Eurozone economic growth is “stalling.”
Japan’s Economy to Stay on Recovery Track but China is Cause for Concern
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, highlighting 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 hovering above ¥146. 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:
Japan’s gross domestic product for the April-June quarter posted a third straight quarterly rise, with the pace of increase accelerating fast to 1.5% on quarter, or an annualized 6.0%, as a sharp rebound in net exports, led by recovering auto exports and easing import costs, mitigated the effects of sluggish consumer spending and business investment. It followed growth of 0.9% on quarter, or an annualized 3.7% in January-March.
The real annualized GDP amount rose to a record high ¥560.74 trillion in the April-June quarter and real compensation of employees recorded its first rise in seven quarters amid high wage hikes. On the downside, private consumption posted its first drop in three quarters due to higher prices for food and appliances and despite recovery in spending services. Some households had already purchased cars, electric appliances and furniture during the earlier phase of the pandemic.
The government upgraded its assessment of exports for the first time in three months, saying they are “showing signs of a pickup,” compared to its previous view that they were “firm.”
The index of export volumes rose a seasonally adjusted 3.5% on the month in July after rising 3.3% in June and falling 2.0% in May, as eased supply constraints have revved up automobile production and demand for semiconductors appears to be bottoming out, according to the Cabinet Office.
Japanese export values posted their first year-over-year decline in 29 months in July as sluggish global demand for mineral fuels, semiconductor-producing equipment and electronic parts and devices more than offset the impact of recovering automobile shipments, data released earlier this month by the Ministry of Finance showed.
The BOJ’s real export index rose 1.1% on the month in July after rising 5.2% in Jue and falling 3.5% in May. The pace of increase decelerated due to a slower rise in shipments of capital goods after a sharp rebound in June as well as a small drop in exports of autos and auto parts following recent strong gains.
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.”
In August, a powerful typhoon disrupted domestic transportation by train and car during the mid-month o-bon holidays but the traffic was still up from a year earlier. The heat wave has been a double-edged sword, supporting sales at airconditioned retail stores while having a dampening effect on outdoor leisure facilities.
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 11th straight year-on-year growth in June as hotels, restaurants, factories and construction firms continued to fill job vacancies amid resilient consumer spending while the unemployment rate improved slightly to 2.5% from 2.6% in May as fewer people began looking work for the second straight month and job cuts had steadied, data released last month by the Ministry of Internal Affairs and Communications showed. The jobless rate is forecast to be steady at 2.5% for July in Tuesday’s data.
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 18th straight year-on-year rise, up 2.3% in June, after rising 2.9% in May. But in real terms, average wages fell 1.6% on year in June after slipping 0.9% in May.
Nominal income conditions are expected to improve further. Summer bonuses are up further after a sharp gain last year and firms are raising hourly wages to secure workers. Effective in October, the average minimum wage for the 47 prefectures will be raised to ¥1,004 for this fiscal year, up from ¥961 previously.
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 rebounded on the month in June, up 2.4% (revised up from a preliminary 2.0% rise), after posting a 2.2% drop in May for the first decline in four months, led by automobiles amid improving supply chains as well as electronic parts and general machinery, 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 give up all of June’s gain in July, down a sharp 2.7%, before posting a modest 1.1% gain in August. The median economist forecast for July output, due on Aug. 31, is a smaller 1.4% 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 “largely flat” vs. “firm” (the first downgrade in 18 months; upgraded in June 2022; last downgraded in February 2022).
* 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” vs. “firm” (the first upgrade in three months; last 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” (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).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).