Japan Keeps Its View on Economic Recovery After Ruling Coalition Loses Majority in Lower House Election; BOJ’s Stance of Gradually Raising Rates Seen Intact

By Max Sato

(MaceNews) – Japan’s government maintained its overall assessment that the economy’s “modest recovery” is set to continue after the ruling coalition lost a majority in the Lower House election Sunday, setting the stage for a tight race to elect the prime minister between the conservative Liberal Democratic Party and the main opposition Constitutional Democratic Party of Japan.

In the 465-seat House of Representatives, the LDP won 191 seats, down sharply from 256 seats it had held before the election. Komeito was also reduced by eight seats to 24. Together, the coalition has only 215 seats, short of a simple majority of 233. By contrast, the CDPJ increased by 50 to 148 seats while the Democratic Party for the People also saw its seats rise to 28 from seven. The focus is on whether the CDPJ can garner support among fragmented opposition parties.

Despite speculation in the financial markets that the new political uncertainty could delay the process of the Bank of Japan’s normalizing its policy, the central bank is expected to stay on course by gradually raising the target for the overnight interest rate toward at least 1% from 0.25% now.

Prime Minister Shigeru Ishiba, who took office on Oct. 1, told reporters this month that the government would “avoid discussing specifics” of what the BOJ should do to achieve 2% price stability with sustained wage hikes while saying, “I expect the basic tone of monetary policy to be maintained.” Many of the bank’s board members are also calling for a cautious approach to normalizing the bank’s policy after years of keeping interest rates near zero.

Yoshihiko Noda, leader of the Constitutional Democrats, was prime minster from September 2011 until December 2022 and also served as finance minister when the Democratic Party of Japan, the predecessor of his current party, was briefly in power from 2009 until late 2022. Thus, he is also aware of the importance of having an independent central bank.

In its monthly report for October released Tuesday by the Cabinet Office, the government said the economy is “recovering at a moderate pace, although there are some areas where it is pausing.”

The government continued to warn against downside risks from slower growth in other countries, “including the effects of continued high interest rate levels in the U.S. and Europe and the lingering stagnation of the real estate market in China.”

It also repeated the need to keep a close watch on inflation, the Middle East conflict and “fluctuations in the financial and capital markets” following fluctuations in the dollar/yen exchange rate.

“The government and the Bank of Japan will continue to work closely together to conduct flexible policy management in response to economic and price developments,” the government said, repeating its recent statements. It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, by conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”

The government dropped the line about its resolve to “completely overcome deflation and help guide the economy move on to a new growth-oriented stage.” This indicates that it is no longer concerned about the risk of Japan slipping back into constant price drops.

The Bank of Japan’s nine-member board is widely expected to decide in a unanimous vote to maintain the target for the overnight interest rate at 0.25% at their two-day ending on Thursday amid gyrations in financial markets including the recent jump in the dollar toward Y153 from a low of around Y142 hit in late September.

Economists and market participants expect the bank to raise its policy rate by 25 basis points at the Dec. 18-19 meeting. The board stood pat in September after voting 7 to 2 to hike the rate to 0.25% from a range of 0% to 0.1% in July, citing gradually rising inflation expectations among households and businesses.

Governor Kazuo Ueda told reporters in Washington on Oct. 24 after a regular meeting of the Group of 20 finance ministers and central bank governors that the BOJ still has time to consider when to raise interest rates as part of its policy normalization process following a decade of large-scale monetary easing aimed at reflating the economy. In March, the bank conducted its first rate hike in 17 years and ended the seven-year-old yield curve control framework in a 7 to 2 vote.

As for overseas economies, the government maintained its overall assessment, saying, “The world economy is picking up, although it is pausing in some regions.”

The government said the Chinese economy is “pausing” even though there is an increase in supply thanks to the effects of policy measures. It regards the U.S. economy as “expanding” while noting both the Eurozone and the UK economy are “picking up.”

Key points from the monthly report:

The government downgraded its view on industrial production for the first time in eight months, saying factory output is “flat.” Previously, it said production was “showing signs of a pickup.”

Industrial production plunged 3.3% on the month in August after an upwardly revised 3.1% in July and slumping 4.2% in June. Auto factory output was hampered by a powerful typhoon, which more than offset the uplifting effects of solid global demand for semiconductors, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed.

METI’s survey of producers indicated that output is expected to rise just 0.3% in September before rising a further 2.0% in October.

In the September report due on Thursday, production is forecast to rebound a modest 0.8% on the month in line with a pickup in real exports. Toyota Motor resumed output of some models suspended earlier amid a false safety record scandal. Global demand for semiconductors also remains solid.

The government maintained its assessment of private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up while weakness remains in some areas.”

Real household spending fell 1.9% on year in August, after edging up 0.1% in July and falling 1.4% in June, as consumers remain generally frugal amid rising costs for necessities and a powerful typhoon and rain storms forced some stores to close.

The decline was mainly caused by volatile factors of vehicle purchases and spending on home repairs and maintenance, which pulled down overall spending by a combined 2.49 percentage points. A pullback in domestic and overseas package tours also made a negative 0.51-point contribution. Those factors were partly offset by continued solid expenditures on eating out (drinking, Japanese food) and slightly more generous post-pandemic spending on weddings and funerals.

The BOJ’s supply-side consumption activity index was nearly flat (-0.0%) on the month in August on a seasonally adjusted basis after falling 0.1% in July and rising 0.6% in June. The index rose just 0.1% in the July-August period compared to the April-June quarter, when it rose 0.8% on quarter. Figures exclude inbound tourism consumption but include outbound tourism spending.

The government also maintained its assessment of exports, saying they are “largely flat.”

Japanese export values fell 1.7% for their first year-on-year drop in September, led by a pullback in automobiles as well as declines in mineral fuels and construction/mining equipment, offsetting continued solid demand for semiconductor-producing equipment. It followed a revised 5.5% gain in August.

Shipments to China, a key export market for Japanese goods, posted their first year-on-year drop in 10 months, down 7.3%, hit by lower demand for autos and auto parts and mineral fuels. Japanese exports to the European Union fell 9.0% for the sixth straight fall, hit by lingering sluggish demand for automobiles, iron and steel and construction machinery. Even exports to the United States fell 2.4% on autos and construction machinery, after marking their first drop in 35 months (down 0.7%) in August.

Other details:

The government’s assessment of key components of the economy in the monthly economic report:

* Private consumption is “picking up while weakness remains in some areas” (unchanged; upgraded in August 2024; downgraded in February 2024).

* Business investment is “showing signs of a pickup” (unchanged; upgraded in March 2024; downgraded in November 2023).

* Housing construction is “largely flat” (unchanged; upgraded in August 2024’ downgraded in September 2023).

* Public investment is “solid” (unchanged; upgraded in July 2024; downgraded in June 2024).

* Exports are “largely flat” (unchanged; upgraded in August 2023; downgraded in July 2024).

* Imports are “largely flat” (unchanged: upgraded in May 2024; downgraded in March 2024).

* Industrial production is “flat” vs. “showing signs of a pickup” (the first downgrade in eight months; upgraded in May 2024; last downgraded in February 2024).

* 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 pace of increase in bankruptcies is “slowing” (unchanged; upgraded in September 2024; downgraded in January 2023).

* Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).

* Domestic corporate goods prices are showing “a slower pace of increase“ (unchanged; last changed in September 2024).

* Consumer prices “have been rising at a moderate pace” (unchanged: last changed in January 2024).

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