By Max Sato
In its monthly report for February released Wednesday 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 wording has not changed since August, when it upgraded its view, citing the effects of wage hikes in fiscal 2024 ending March 2025 and temporary income tax credits.
Looking ahead, “the economy is expected to continue recovering at a moderate pace with the improving employment and income conditions, supported by the effects of the policies.” The government has revived temporary utility subsidies to help lower electricity and natural gas bills during the winter heating season from January to March (bills paid from February to April). It is also providing cash handouts to low-income families.
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 “the effects of inflation, U.S. trade policies, the situation in the Middle East and fluctuations in the financial and capital markets.” The yen has regained only slightly and basically remains depressed against the dollar on general expectations that the U.S. Federal Reserve will be cautious about providing a further rate relieve until core inflation becomes more benign while the Bank of Japan is expected to continue raising interest rates at a snail’s pace from zero. The dollar has eased to around Y152 from Y158 at the start of the year but is still well above Y141 seen in September 2024.
Data released Monday showed that Japan’s gross domestic product for the October-December quarter posted its third consecutive growth, accelerating back to 0.7% on quarter, or an annualized 2.7% after a third quarter slowdown, but it was largely due to a technical rebound in net exports, up 0.7 percentage point (after four quarters of drops), that was caused by a sharper-than-expected slump in imports and masks weak exports. Domestic demand trimmed total domestic output by 0.1 point in Q4 after boosting the Q3 GDP by 0.5 point.
China is struggling to recover from the property market slump and demand for Japanese vehicles and construction machinery in the U.S. market is fading under the weight of high borrowing costs. Private consumption rose slightly instead of an expected slip but remains sluggish amid high costs and depressed real wage growth.
Japan’s GDP growth in the January-March quarter is expected to remain subdued as consumers stay frugal and firms are still cautious about implementing their solid capex plans. Many firms’ plans to invest in new capacity are supported by demand for automation amid widespread labor shortages as well as government-led digital transformation and emission control.
The government repeated that with the Bank of Japan it “will continue to work closely together to conduct flexible policy management in response to economic and price developments.” 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 Bank of Japan’s nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points to 0.5% in a third rate hike during the current normalization process begun in March 2024. Board member Toyoaki Nakamura, a former Hitachi executive, voted against the rate hike at this point, giving the same reason that he did in July: It would be better to wait until next meeting, in March, and confirm whether firms’ ability to earn profits are rising.
Citing “significantly low” real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and “adjust the degree of monetary accommodation” without hurting economic activity. Judging from views expressed by board members last year, the bank is staying the course of lifting the rate to at least 1%, which could still barely provide a minimum safety margin when a global crisis hits.
The government continues to view the Chinese economy as “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 the Eurozone is “picking up” and Germany is struggling. It downgraded its view on the UK, saying its pickup is “pausing.”
Key points from the monthly report:
The government maintained its assessment of private consumption, which accounts for about 55% of gross domestic product, saying it is “picking up while weakness remains in some areas.”
Real household spending unexpectedly surged in December, rising 2.7% on year and following a 0.4% dip to mark the first increase in five months and only the third in 12, as deal-hungry, inflation-weary consumers rushed to donate to prefectures that offer generous free goods and services in return by the Dec. 31 tax year deadline. It is still uncertain whether the recent uptrend is sustainable.
The jump to Y352,633 in overall spending was the highest amount in 21 years (since Y355,228 in December 2003) and much stronger than the consensus call of a 0.3% slip, but it was also due to other volatile factors of vehicle purchases and home maintenance. Overall, households are cautious, trimming spending on vegetables (tomatoes, cabbage) and gift money (mostly sent to children studying away from home) as the costs for both fresh and processed food had been boosted by bad weather, high import costs amid the weak yen and prolonged domestic rice supply shortages.
Total monthly average cash earnings per regular employee in Japan posted their 36th straight year-on-year rise, up a nominal 4.8% in December, after rising 3.9% in November. Base wages rose 2.7% on year, up from a downwardly revised 2.5% gain the previous month. Real average wages rose 0.6% after marking their first y/y rise in five months in November, up 0.5%.
The government maintained its view on industrial production.
Production slipped 0.2% on the month, instead of the initial estimate of a slight 0.3% rebound, in December, after slumping 2.2% in November and surging 2.8% in October, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed. The decrease was led by producers of chemical products (drugs, skin lotions), food and tobacco (spirits, cocktails) and automakers (passenger cars, light vehicles, engines). The preliminary increase was due to higher output of production machinery (chemical equipment and industrial robots) as well as electronic parts and devices (memory chips and liquid crystal displays), which more than offset depressed auto output.
METI’s survey of producers released last month indicated that output would slip back 2.1% in January before marking a partial 1.2% rebound in February.
The government upgraded its assessment of exports for the first time in 18 months, saying they are “showing signs of a pickup” based on trade through December, when export values rose 2.8% on year to a record high ¥9.91 trillion, leading to an unexpected trade surplus. Previously, it had said exports were
“largely flat.”
The latest data released Wednesday showed that Japanese export values rose an above-trend 7.2% on year in January for a fourth straight year-on-year rise. The increase was led by solid demand for autos and drugs as well as by a volatile factor of ships. Export volumes, however, dipped 1.7% for the second consecutive fall amid struggling economic recovery in China and parts of Europe.
By contrast, the government downgraded its view on imports for the first time in 11 months, saying they are “largely flat,” also based the December trade data. Previously, imports were “showing signs of a pickup.”
The January trade data showed that import values marked their second straight increase, up 16.7%, following a 1.8% rise the previous month and reflecting higher purchases of smartphones, computers and drugs as expected. Import volumes rose 8.7% for the second straight gain. Both exports and imports showed some irregular patterns, going into the lunar new year holidays in some Asian countries that began on Jan. 29.
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 “resilient” (unchanged; upgraded in July 2024; downgraded in October 2024).
Exports are “showing signs of a pickup” vs. “largely flat” (the first upgrade in 18 months; last upgraded in August 2023; downgraded in July 2024).
Imports are “largely flat” vs. “showing signs of a pickup” (the first downgrade in 11 months; upgraded Oct 2024; last downgraded in March 2024).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “improving as a whole but its pace is moderate” (unchanged; upgraded in September 2023; downgraded in December 2024).
Business sentiment is “improving” (unchanged; upgraded in December 2023; downgraded in March 2022).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; 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 “rising gradually” (unchanged; last changed in September 2024). Consumer prices are “rising” (unchanged: last changed in January 2024).