By Max Sato
The government noted that households’ purchasing power has been eroded by high costs of daily necessities, which has left real wages below year-earlier levels despite solid wage hikes amid widespread labor shortages. It continued to warn that Japan faces downside risks from the impact of the past rapid interest rate hikes in other major economies, China’s slow economic recovery and the war in the Middle East.
In its December report, the government said the economy is “recovering at a moderate pace, although it appears to be pausing in some areas.” November’s downgrade was the first since January 2023, when it said the economy was “picking up moderately, although some weaknesses have been seen recently.”
The overall assessment was last upgraded in May 2023 for the first time in 10 months. Until April, the economy had been “picking up moderately, although some weaknesses are seen.”
The government believes there is still a risk of Japan falling back into deflation as
the current inflation around 3% in Japan has been caused by a spike in import prices and not sufficiently backed by domestic demand or wage growth.
It 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 its Dec. 18-19 meeting, the BOJ policy board voted unanimously to maintain its basic monetary easing stance under the seven-year-old yield curve control framework backed by large asset purchases, keeping its long-term interest rate target officially “around zero percent,” with an actual upper limit around 1%, and the target for the overnight rate at minus 0.1%, in a decade-long campaign to achieve stable 2% inflation with sustainable wage growth.
The board also retained 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 the previous meeting in October, the board decided in an 8-to-1 vote to
make the yield curve control framework “more flexible” by calling its desired 1% upper end of the 10-year Japanese government bond (JGB) yield a “reference,” instead of a definite line that the bank had been trying to defend with market operations. It also discontinued the range for the long bond yield, which had been set between minus 0.5% and plus 0.5%.
Governor Kazuo Ueda told a post-meeting news conference on Oct. 31 that the decision to make the policy framework more flexible was partly due to an upward revision to the board’s inflation forecast but largely due to upward pressures on the JGB yields from overseas bond markets.
In his semi-annual report to parliament earlier this month, Ueda said it was not yet time to shift the bank’s policy stance toward tightening. “The Bank considers that sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and that it is important to closely monitor whether a virtuous cycle between wages and prices will intensify,” he said.
The government said it will support widespread wage hikes and robust business investment under Prime Minister Fumio Kishida’s “new capitalism” programs. It aims to guide firms from cost cuts, a common practice for survival that has been in place for 30 years, toward sharing profits with workers and investing more in growth areas. It has put together an economic stimulus package, with which it hopes to help businesses move toward investing in new growth areas from playing safe with cost cuts.
Using its “comprehensive” economic plans, the government will help “strengthen supply side that will powerfully promote change” and “improve people’s sense of well-being,” which should reduce sources of instability in the economy and tide over elevated costs for daily necessities.
The government will “swiftly implement” its supplementary budget for fiscal 2023 which has been approved by lawmakers. It will draft a budget for fiscal 2024 by yearend and seek parliamentary approval before the next fiscal year starts on April 1.
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.
Japan’s Economy to Stay on Recovery Track; Same Downside Risks Remain
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, repeating its concern over the challenges facing the world’s second largest economy arising from heavily indebted property developers.
“Also, full attention should be given to price increases, the situation in the Middle East and fluctuations in the financial and capital markets.”
The yen remains relatively weak, keeping Japan’s purchasing power low, but the dollar has fallen to a four-month low of just under ¥143 on expectations that the Federal Reserve will lower interest rates three times next year while the BOJ is likely to conduct its first rate-hike since 2007 next year. The dollar had risen above ¥151 in November, 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 upgraded its assessment of business sentiment for the first time in two months, saying it is “improving.” Previously it was “improving moderately as a whole.”
Confidence among manufacturers and non-manufacturers in Japan all picked up more than expected in December on improved supply chains, a bottoming chip market and falling import costs, but many industries are cautious about their near-term outlook amid slowing global growth and widespread domestic labor shortages, the BOJ’s quarterly Tankan business survey released last week showed.
The Tankan diffusion index showing sentiment among major manufacturers posted its third straight quarterly increase in December, rising to the highest since 14 in March 2022, while the index measuring sentiment among major non-manufacturers marked its seventh consecutive quarterly improvement, after hitting a 32-year high in September.
The Ministry of Finance’s own quarterly business survey also showed that combined corporate sales and profits hit record highs in the July-September period.
The government maintained its assessment of business investment in equipment after downgrading it for the first time in 23 months in November, saying its pickup is “pausing.”
Core machinery orders, the key leading indicator of business investment in equipment, unexpectedly posted a second straight monthly gain in October, up 0.7%, as demand for computers is mixed among industries after recent gains, data released last week by the Cabinet Office showed. But core orders marked their eighth straight decline from a year earlier, down by a smaller-than-expected 2.2%.
By contrast, capex plans among many companies remain positive.
The BOJ’s Tankan survey showed major firms projected their plans for business investment would rise a combined 13.5% on the year in fiscal 2023 ending in March 2024, revised down only slightly from the 13.6% increase planned in the September survey but still higher than a modest 3.2% rise planned in March. Smaller firms revised up their combined capital spending plans further to a 10.3% rise in fiscal 2023 after jacking them up to an 8.0% rise in September from a 2.4% increase planned in June and an unusually bullish 1.4% rise projected in March.
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 disposable incomes have been sliding along with weak real wages. Total monthly average cash earnings per regular employee in Japan posted their 22nd straight year-on-year rise, up 1.5% in October, but after adjusted for inflation, real average wages fell 2.3% in October for the 19th consecutive drop.
Japan’s real household spending posted its eighth straight drop on the year in October, down 2.5%, as high costs for daily necessities promoted many to remain frugal and the lingering heat wave damped demand for autumn clothing and heaters, data released this month by the Ministry of Internal Affairs and Communications showed. On the month, expenditures dipped just 0.1% after edging up 0.3% in September. Pent-up demand for eating out and traveling had already shown slower momentum.
The Bank of Japan’s supply-side consumption activity index rebounded a seasonally adjusted 0.5% on the month in October after dipping 0.4% in September and edging up 0.1% in August. The index rose 0.3% in the first month of the fourth quarter compared to the third quarter, when it rose 0.7%. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government changed the wording for consumer prices to say they “have been rising at a moderate pace,” instead of simply “rising.” It does not say whether it is an upgrade or downgrade in its assessment of prices but it reflects some easing of household burden as the increase in goods prices has peaked.
The last change was made in May 2022, when it noted progress in reflating the economy by effectively upgrading its view from its previous statement that prices were “rising gradually.”
Consumer inflation in Tokyo, the leading indicator of the national average, eased at a faster pace than expected in November as markups in processed food had peaked and hotel fees rose in reaction to a subsidized drop a year earlier, following an uptick in October, when halved subsidies for electricity and natural gas utilities slowed the sharp drop in energy costs, data from the Ministry of Internal Affairs and Communications released this month showed.
The national average CPI data for November, due on Friday, is forecast by economists to show the core CPI (excluding fresh food) rose 2.5% on the year, led by elevated prices for processed food and rising service costs amid labor shortages, with the pace of increase decelerating from 2.9% in October.
The government maintained its view on employment conditions after upgrading it for the first time in 11 months in June 2023, saying they are “showing signs of improvement.”
Japanese payrolls posted their 15th straight rise on year in October as hotels, restaurants and information communications firms hired more workers to cope with widespread labor shortages while the unemployment rate fell to 2.5% from 2.6% for the second straight monthly improvement, data released last month by the Ministry of Internal Affairs and Communications showed.
The government maintained its assessment of exports after upgrading it for the first time in three months in August 2023, saying they are “showing signs of a pickup.”
The index of export volumes fell a seasonally adjusted 1.1% on the month in October after rebounding 5.2% in September and slumping 5.9% in August, according to the Cabinet Office.
Japanese export values posted their second straight year-on-year increase in October, rising a stronger-than-expected 1.6% to the second highest amount on record on continued solid demand for automobiles, but shipments to the world slowed after climbing 4.3% to a record high in September as credit tightening by major central banks is dampening demand for electronic parts and devices, data released last month by the Ministry of Finance showed.
The trade data for November, due on Wednesday, is forecast by economists to show exports rose 1.9% in November for a third straight year-on-year rise. Demand for automobiles from the US and Europe remains strong while that for semiconductor-producing equipment has been sluggish and orders from China have been weak.
The BOJ’s real export index edged up 0.8% on the month in October after rising 4.4% on the month in September and slumping 6.1% in August. Shipments of automobiles and auto parts picked up further and those of information technology goods rebounded after recent drops. Shipments of intermediate goods fell and exports of capital goods slowed.
The government also 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.”
Japan’s industrial production made a solid start to the final quarter of 2023, posting its second straight rise on the month in October, up 1.3% (revised up from a preliminary 1.0%), as output of electronic parts and devices rebounded after a recent slip and demand for automobiles remains strong on improved supply chains, revised data released last week by the Ministry of Economy, Trade and Industry showed. The METI’s survey of producers conducted last month indicated that output is expected to fall 1.9% in November, giving up all of the gains made in the previous two months, before rebounding 3.2% in December.
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).
* 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” (unchanged; upgraded in September 2023; downgraded in March 2023).
* Business sentiment is “improving” vs. “improving moderately as a whole” (the first upgrade in two months; last upgraded in October 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” vs. “have been rising” (the first change in wording in 19 months; upgraded in May 2022; downgraded in March 2020).