By Max Sato
(MaceNews) – Japan’s government Tuesday warned that consumer spending, which accounts for over half of domestic output, is showing soft spots despite its overall improvement from the pandemic-caused slump, according to its monthly report released by the Cabinet Office.
While noting increasing export volumes, particularly of automobiles and semiconductor-producing equipment, the government also downgraded its assessment of leading European economies for the second consecutive month.
The government maintained its cautiously optimistic view that both the domestic and global economies are “showing signs of a pickup,” a statement unchanged since July when it revised up its overview.
On the near-term outlook, the government repeated, “The economy is expected to continue showing signs of picking up, supported by the effects of the policies and improvement in overseas economies.”
But it also continued warning about the negative impact of lockdowns and tougher restrictions of economic activity in many countries, saying, “… full attention should be given to the further downside risks to the domestic and foreign economies.”
The government downgraded its assessments on the Eurozone, Germany and Britain for the second straight month after revising them down for the first time since April last month as the impact of the coronavirus intensified.
The Eurozone gross domestic product is forecast by the European Central Bank to contract 2.2% on quarter in October-December while the Organization for Economic Co-operation and Development expects the regional GDP to fall 2.7% in the final quarter of 2020, it said.
The monthly report came on the heels of the cabinet decision Monday on the outline of a record Y106.6 trillion ($1.03 trillion) budget for the next fiscal year starting on April 1, up from the initial fiscal 2020 budget of Y102.7 trillion.
This has raised concerns over Tokyo’s slow progress in trimming massive public debt topping Y1,000 trillion, or more than double Japan’s total domestic output, the worst among major economies.
Parliament is expected to debate the fiscal 2021 budget as well as the third extraordinary budget for fiscal 2020 from mid-January until late March.
The government plans to issue Y43.6 trillion in new bonds to finance programs to support households and businesses hit by COVID-19, growing public healthcare and pension costs as well as growth strategies focused on securing green energy sources and digitalization of the economy. It will be the first increase over the initial budget of the previous fiscal year in 11 years.
As tax revenues are estimated to fall due to the lingering drag from the pandemic, 40.9% of the fiscal 2021 budget will be funded by debt, compared to 31.7% in the initial budget for the current year.
The government plans to earmark Y5 trillion as reserve funds for further response to the global pandemic. In a fast-aging society, social security costs are estimated to hit a record Y35.8 trillion, accounting for about a third of the national budget in fiscal 2021. The defense budget will rise 0.5% on year to Y5.3 trillion, marking a record high for the seventh straight year.
Key points from the monthly report:
The government revised down its view on private consumption for the first time in three months, pointing to weakness in spending on some services, such as eating out and traveling amid a renewed spike in coronavirus cases. Spending on some goods remained solid, as seen in new vehicle sales.
On the other hand, the official view on Japanese exports was revised up for the first time in three months. Export volumes remain below year-earlier levels, down 4.0% y/y in November, but they have been rising month to month, up a seasonally adjusted 3.7% m/m in the same month, Cabinet Office data showed.
Export values unexpectedly slumped 4.2% on year in November for the 24th straight y/y drop after a 0.2% fall in October and double-digit percentage drops in recent months, Ministry of Finance data released last week showed.
By contrast, the Bank of Japan’s real export index rose 3.7% on month in November, posting the sixth straight m/m gain after rising 4.5% in October.
Other details:
The government’s assessment of key components of the economy in the monthly economic report.
* Private consumption is “picking up as a whole while weakness is seen in some sectors” vs. “picking up.” (the first downgrade since September; last upgraded in October).
* Business investment is decreasing (unchanged; downgraded in November)
* Exports are “increasing” vs. “picking up” (the first upgrade since September).
* Corporate profits are “decreasing substantially” due to the impact of COVID-19 but “the rate of decline is slower as a whole” vs. “decreasing substantially.” (the first upgrade in 18 months).
* Employment conditions are improving with some soft spots (unchanged; upgraded in September).
* Consumer prices are flat (unchanged; downgraded in March).