By Max Sato
In its monthly report for December released Friday 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 hasn’t changed since August, when it upgraded its view, citing the effects of wage hikes 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 already said it will temporarily revive utility subsidies to help lower electricity and natural gas bills during the winter heating season from January to March. It will also provide 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 price increases, future policy trends in the U.S., the situation in the Middle East and fluctuations in the financial and capital markets.” The yen has depreciated sharply as the dollar jumped on expectations that the U.S. Federal Reserve will slow the pace of interest rate cuts while the Bank of Japan is cautious about raising rates. The dollar stood just under Y158, up from Y150 at the start of December and well above Y143 seen at the start of the year.
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.”
At its latest meeting on Dec. 18-19, the BOJ’s nine-member board decided in an 8 to 1 vote to maintain the target for the overnight interest rate at 0.25%. Governor Kazuo Ueda told reporters after the meeting that the bank’s policymakers may receive clearer data and information in March or April that would allow them to decide confidently whether to go ahead with their third interest rate hike in the current cycle. That would be a little later than a rate hike in January, which had been projected by some economists before the December meeting.
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 that both the Eurozone and the UK economy are “picking up.”
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 posted a 1.3% drop on year in October for a third straight decline as unusually mild weather dampened demand for autumn clothing and other seasonal goods while consumers remain frugal amid high costs for necessities and sluggish real wages.
Consumer inflation in Japan accelerated in all three key measures in November, with the core reading (excluding fresh food) up 2.7% on year after easing to 2.3% in October from 2.4% in September and 2.8% in August. Temporary utility subsidies to cap high energy costs arising from peak time air conditioner usage were scaled back at the end of the three-month program. Processed food prices have also been pushed by lingering rice shortages across Japan.
The CPI increase was led by higher costs for processed food +4.2% y/y (+1.00 point contribution) in November vs. +3.8% (+0.92 point) in October and overall energy +6.0% (+0.45 point) vs. +2.3% (+0.17 point).
Services costs minus owners’ equivalent rent rose 2.1% on year in November, little changed from +2.2% the previous month while goods prices minus fresh food increased at a much higher pace of 3.7%, up from +2.9%. This indicates wage growth needs to accelerate further to anchor inflation in a sustainable manner.
The BOJ’s supply-side consumption activity index marked the third straight month-on-month drop in October, down a seasonally adjusted 0.4, after edging down 0.1% in September and slipping 0.2% in August. The index dipped 0.6% on quarter in October after rising 0.9% in July-September. Figures exclude inbound tourism consumption but include outbound tourism spending.
The government maintained its view on industrial production.
Production rose 2.8% on the month in October for a second straight rise after rebounding 1.6% in September and plunging 3.3% in August, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed. Resumed output of some Toyota models after suspension over safety check concerns had already lifted overall factory output in September.
METI’s survey of producers indicated last month that output would fall 4.1% in November and dip a further 0.5% in December, both in payback for October gains in production machinery and automobiles. In the November report due on Dec. 27, production is forecast to post its first drop in three months, down 3.5%, according to a Mace News survey of economists.
The government also maintained its assessment of exports, saying they are “largely flat.”
Japanese export values posted a second straight year-on-year rise in November, up 3.8%, after rising 3.1% in October, led by solid demand for semiconductor-producing equipment, non-ferrous metals and food. Shipments of automobiles, iron/steel and construction/mining machines dropped amid slowing global growth. Export and import volumes both recorded their first fall in two months, indicating a soft start to Q4 economic growth.
Shipments to China, a key export market for Japanese goods, rose 4.1% on year in November, after rising 1.4% in October and marking their first fall in 10 months with a 7.3% slump in September. The increase reflects a pickup in demand for non-ferrous metals, organic compounds (cosmetics, etc.) and semiconductors. Auto shipments were down.
Exports to the United States, which is still the largest market for Japanese exports, dipped 8.0% after a 6.2% fall, marking their fourth straight drop in light of resilient but cooling U.S. economic growth and reflecting lower demand for automobiles, drugs and construction/mining machines as largely seen in the previous month. Shipments to the U.S. recorded their first year-on-year decline in 35 months in August (-0.7%) and have since shown a larger drop every month. Japanese exports to the European Union slumped 12.5% for the eighth straight fall after an 11.3% dip amid sluggish demand for automobiles, ships and iron/steel.
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 “largely flat” (unchanged; upgraded in August 2023; downgraded in July 2024).
Imports are “showing signs of a pickup” (unchanged; upgraded Oct 2024; 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” vs. “improving as a whole” (the first downgrade in 21 months; upgraded in September 2023; last 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 “rising gradually” (unchanged; last changed in September 2024).
Consumer prices are “rising” vs. “rising at a moderate pace” (unchanged: last changed in January 2024).