By Max Sato
The Japanese economy is showing resilience, thanks to improving supply deliveries and waning effects of the pandemic, with domestic demand set to lead a top growth rate among the Group of Seven major nations this year despite weakening global demand and jitters over bank failures in the U.S. and Europe.
The International Monetary Fund has forecast that Japan’s economy will grow 1.8% in 2023, above its projection of 1.4% for the U.S. and 1.2% for major economies.
In its April report, the government said the economy is “picking up moderately, although some weaknesses are seen.” The latter part was added in January, when the overview was downgraded for the first time in 11 months.
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.”
The bank’s policy board under the new governor, Kazuo Ueda, is expected to maintain its monetary easing stance, for now, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to guide inflation toward the stable 2% target with sustained wage growth. Ueda’s five-year term began on April 9. He is the first academic to lead the BOJ’s policy board in the bank’s modern history.
For its part, the government will “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. It will also 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.
The government revised up its view on China for the second straight month, saying that “it has been showing signs of a pickup,” leaving out the part that “some areas of the economy have weak spots.”
On the near-term outlook for the Japanese economy, the government repeated its recent view, saying, “The pickup in the economy is expected to continue under the new normal, supported by the effects of the policies.”
“However, slowing down of overseas economies is a downside risk to the Japanese economy amid ongoing global monetary tightening and other factors,” the government warned, repeating its recent assessment. “Also, full attention should be given to price increases, supply-side constraints and fluctuations in the financial and capital markets.”
Key points from the monthly report:
The government maintained its assessment on private consumption, which accounts for about 55% of the gross domestic product, saying it is “picking up moderately.” Consumption is resilient, led by pent-up demand for services, despite sluggish spending on goods.
Real average spending by households with two or more people rebounded 1.6% on the year in February for the first rise in four months after falling 0.3% in January as the economy continues to reopen without strict public health rules, but the increase was partly offset by the widespread move to switch to discount mobile phone plans.
On the month, household spending slumped a seasonally adjusted 2.4% in February, giving up most of the hefty 2.7% gain made in January, as many consumers have been hit by continued markups in daily necessities and falling real wages.
Consumer inflation in Japan was steady to slightly lower just above 3% in two key measures in March after slowing significantly the previous month from four-decade highs of over 4% in January as expanded subsidies to electricity and natural gas suppliers continued to cap energy costs, data from the Ministry of Internal Affairs and Communication released Friday showed.
But the annual rate of the core-core index (excluding fresh food and energy) accelerated toward 4%, reflecting a widespread move among processed food suppliers to pass last year’s spike in producer and import costs onto customers.
The national average core consumer price index (excluding fresh food) rose 3.1% from a year earlier in March, as expected. It is the 19th straight year-over-year increase after rising 3.1% in February (the first deceleration in 13 months), 4.2% in January and 4.0% in December.
Producer inflation in Japan continued to ease to 7.2% on year in March from 8.2% in February, 9.5% in January and a 42-year high of 10.6% in December, as the government’s expanded utilities subsidies continued to cap energy costs and slowing global demand has cooled off commodities markets.
Looking ahead, domestic demand is likely to be supported by consumer spending on goods and services as the economy continues to reopen, but the purchasing power of many households has been reduced by rising costs for daily necessities and falling real wages.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from March 25 to March 31 and released April 10, indicated that confidence continued picking up in March on eased Covid public health rules, although some survey respondents noted rising food prices are limiting spending on clothing and elevated materials costs are squeezing corporate profits.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted its second straight monthly increase in March, rising 1.3 points to a 15-month high of 53.3 on a seasonally adjusted basis, after surging 3.5 points to 52.0 in February. The index is above the key 50 line for the second month in a row but it is still well below the 16-year high of 58.3 hit in December 2021.
The Watchers’ outlook index, which shows sentiment in two to three months, marked its fourth consecutive increase, soaring 3.3 points to a 16-month high of 54.1 in March after rising 1.5 points to 50.8 in February. It is also above 50 for the second straight month. Spending on domestic travel and leisure is expected to be solid during the Golden Week holidays starting April 29.
The gradual pickup in nominal wages in Japan continued while real wages recorded the 11th straight year-on-year drop, data released earlier this month by the Ministry of Health, Labour and Welfare showed.
Total monthly average cash earnings per regular employee in Japan posted their 14th straight year-on-year rise, up a preliminary 1.1% in February, after rising 0.8% in January and surging 4.1% in December, which was led by winter bonus payments that were concentrated at the end of the year. In real terms, average wages fell a preliminary 2.6% on year after slumping 4.1% in January and edging down 0.6% in December.
In its monthly report, the government maintained its assessment of industrial production after downgrading it for the first time in three months in March, saying, factory output “has been in a weak tone recently.”
Japan’s industrial production post a stronger-than-expected 4.5% rebound on the month in February, thanks to easing parts supply constraints for the auto industry, after slumping at a faster pace of 5.3% in January, when automakers suffered parts shortages and many other industries were hit by weaker global and domestic demand, revised data released last week by the Ministry of Economy, Trade and Industry showed.
The METI’s survey of producers indicated that output is likely to post a slight 0.3% drop on the month in March (adjusted for an upward bias) before marking a solid 4.4% rebound in April.
The government maintained its assessment of exports after downgrading it in January, saying they are “in a weak tone,” while upgrading its view on imports for the first time in nine months, noting they are “largely flat,” instead of being “in a weak tone.”
Japanese export values rose on the year at a slower pace in March amid softer global demand even though trade flows appeared to have returned to normal after January’s lunar new year holiday shutdowns in some parts of Asia, data released Thursday by the Ministry of Finance showed. The pace of imports also decelerated, leading to a narrower trade deficit for the second straight month after hitting a record shortfall in January.
Shipments to China, the key export market for Japanese goods, posted their fourth straight year-over-year decline in March, led by declines in autos and auto parts as well as iron and steel. The world’s second-largest economy is gradually recovering from the sluggish activity caused by Beijing’s strict zero-Covid policy.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
* Private consumption is “picking up moderately” (unchanged; upgraded in July 2022; downgraded in February 2022).
* Business investment is “picking up” (unchanged; upgraded in October 2022; downgraded in December 2021).
* Housing construction is “firm” (unchanged; upgraded in June 2022; downgraded in February 2022).
* Public investment “has been firm” (unchanged; upgraded in August 2022; downgraded in November 2021).
* Exports are “in a weak tone” (unchanged; upgraded in December 2020; downgraded in January 2023).
* Imports are “largely flat” vs. “in a weak tone” (the first upgrade in nine months; last upgraded in July 2022; downgraded in January 2023).
* Industrial production “has been in a weak tone recently” (unchanged; upgraded in August 2022; downgraded in March 2023).
* Corporate profits are “improving as a whole, although the pace has become moderate” (unchanged; upgraded in March 2022; downgraded in March 2023).
* Business sentiment is “showing signs of a pickup” (unchanged; upgraded in December 2022; downgraded in March 2022).
* The number of bankruptcies “has been rising” vs. “has been rising, although it is at a low level” (the first downgrade in three months; upgraded in March 2021; last downgraded in January 2023).
* Employment conditions are “picking up” (unchanged; upgraded in July 2022; downgraded in May 2020).
* Consumer prices “have been rising” (unchanged; upgraded in May 2022; downgraded in March 2020).