By Max Sato
In its January report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing in some areas.” In November, it downgraded its view for the first time since January 2023.
In the past few months, consumer sentiment has picked up on improving employment conditions and easing upward pressures on food prices, the government said but it also cautioned that suspended truck output at Toyota Motor group Daihatsu over a vehicle safety scandal since late December can hurt many parts suppliers. It also noted the pickup in exports has slowed.
The government said Japan still needs monetary and fiscal stimulus and growth strategies to keep itself from falling back into deflation, repeating 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 its Jan. 22-23 meeting, the BOJ policy board voted unanimously to maintain its seven-year-old yield curve control framework and retain its guidance that it will “patiently continue with monetary easing” in order to “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
In a decade-long pursuit of stable 2% inflation, the board decided in a unanimous vote to keep the targets of minus 0.1% for the short-term policy rate and “around zero percent” for the 10-year bond yield, the latter of which has a flexible 1% upper limit after having been adjusted twice last year in the face of ripple effects of higher U.S. bond yields.
At the same time, bank officials have been debating an eventual exit from large-scale monetary easing. Many board members have argued they should wait until the spring (from March to May) to confirm whether annual labor talks would lead to a substantial wage hike for the second fiscal year in a row before considering lifting the negative short-term interest rate target or ending the yield curve control framework.
In the quarterly Outlook Report, the bank said underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise. “The likelihood of realizing this outlook has continued to gradually rise, although there remain high uncertainties over future developments.”
The government said it will support widespread wage hikes and robust business investment. It will swiftly implement its supplementary budget for fiscal 2023 and seek parliamentary approval of the fiscal 2024 budget before the next fiscal year starts on April 1. It will also use reserves to rebuild the quake-hit region.
As for overseas economies, the government maintained its overall assessment after upgrading it for the first time in 21 months in May 2023, saying, “The world economy is picking up, although some regions are showing weakness.”
The government continues to see “recovery” in the U.S. economy, “a stalled pickup” in China and “a weak tone” in the Eurozone. It upgraded its view on Taiwan for the second time in three months, saying it is “picking up.”
Japan’s Economy Expected to Stay on Recovery Track
On the near-term outlook for the Japanese economy, the government repeated its recovery outlook adopted in May 2023, 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.
“Also, full attention should be given to price increases, the situation in the Middle East and fluctuations in the financial and capital markets,” it said, adding that it is also watching the economic impact of the earthquake.
The magnitude 7.6 earthquake jolted the Sea of Japan coast areas in Ishikawa Prefecture, killing more than 230 people, most of them crushed under their collapsing homes, and causing damage to more than 30,000 houses. Three weeks after the quake, about 6,200 households remain without electricity, more than 40,000 are without water supply and over 15,000 people are still in evacuation.
The yen remains relatively weak at around ¥148 compared to ¥130 a year ago, keeping Japan’s purchasing power low. The dollar had risen above ¥151 in November 2023, edging closer to a 32-year high of ¥151.94 hit in October 2022, 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 2023, saying it is “picking up.”
Real household spending posted its ninth straight drop on the year in November, down a larger-than-expected 2.9%, after a 2.5% dip in October, as high costs for food and other daily necessities promoted many to remain frugal and partly because home maintenance and repairs as well as vehicle purchases — both volatile factors — declined after rising the previous month, data released this month by the Ministry of Internal Affairs and Communications showed.
The Bank of Japan’s supply-side consumption activity index for November was unchanged from the previous month on a seasonally adjusted basis after falling 0.6% in October. The index fell 0.7% in the first two months of the fourth quarter compared to the third quarter, when it rose 0.9%. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government downgraded its assessment of exports for the first time in 12 months, saying their “pickup is pausing,” compared to its previews view that they were “showing signs of a pickup.”
The index of export volumes slumped a seasonally adjusted 5.6% on the month in November for the second straight drop after falling 1.1% in October and rebounding 5.2% in September, according to the Cabinet Office.
Similarly, the BOJ’s real export index dipped 5.7% on the month in November after rising 1.1% in October and rebounding 4.3% in September. Shipments of automobiles and auto parts slumped after recent gains and those of information technology goods also fell after a rebound in the previous month. Shipments of intermediate goods fell for the second straight month and exports of capital goods slipped back.
Japanese export values rebounded 9.8% on year to a record high in December, led by automobiles as largely expected, after marking their first drop in three months in November with a slight 0.2% dip, but demand for semiconductor-producing equipment remains sluggish amid slower global growth, data released Wednesday by the Ministry of Finance showed.
The government maintained its assessment of industrial production after upgrading it for the first time in nine months in May 2023, saying factory output “is showing signs of a pickup.”
Industrial production posted its first drop in three months in November, down a smaller-than-expected 0.9% on the month (unrevised from the initial reading), on a pullback in automobiles, auto parts and general machinery after recent gains as well as lower orders for electronic and communications equipment, revised data released last week by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is expected to post a solid rebound in December before dropping sharply in January. There is a downside risk to this outlook due to a shipment and production halt announced by Toyota Motor group firm Daihatsu over a vehicle safety scandal after the survey was conducted in early December. The suspension was originally scheduled to last until the end of January but has been extended until mid-February.
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).
* The pickup in business investment is “pausing” (unchanged; upgraded in October 2022; downgraded in November 2023).
* Housing construction is “in a weak tone” (unchanged; upgraded in June 2022; downgraded in September 2023).
* Public investment is “firm” (unchanged; upgraded in July 2023; downgraded in October 2023).
* The pickup in exports is “pausing” vs. exports are “showing signs of a pickup” (the first downgrade in 12 months; upgraded in August 2023; last 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” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving” (unchanged; upgraded in December 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” (unchanged).
* Consumer prices “have been rising at a moderate pace” (upgraded in May 2022; downgraded in March 2020).