Monthly Report of Prospects for Japan's Economy

Transcription

1 Monthly Report of Prospects for Japan's Economy July 212 Macro Economic Research Centre Economics Department This report is the English version of the June 212 issue of the original Japanese version.

2 The general situation of Japan s economy On a recovery trend in total, albeit moderate Figure 1-1 Economic Activity Figure 1-2 The Corporate Sector Figure 1-3 Overseas Demand Economic activity is on a recovery trend in total, as the reconstruction from the disaster advances. Industrial production is on a moderate recovery trend. The inventory ratio has risen in electronic parts and devices. The increase in exports has been driven by exports to the US. Imports stay at a high level. (CY25=1) (CY25=1) (CY25=1) Index of business 15 Industrial inventory conditions (Composite 14 Real exports ratio index 13 1 index, Coincident index) Index of business conditions (Composite index, Leading index) Real imports Industrial production index Source: The Cabinet Office. Source: The Ministry of Economy, Trade and Industry. Source: The Bank of Japan. Figure 1-4 Employment and Income Figure 1-5 The Household Sector Figure 1-6 Housing Investment The unemployment rate has risen due to the increase in jobless persons. Earnings continue to improve. Unemployment rate (left scale) Total cash earnings 1 (y/y % change, 4 right scale) Source: The Ministry of Internal Affairs and Communications, The Ministry of Health, Labour and Welfare. * The shaded area indicates the phase of recession Firm as a whole, partly supported by the government measures for the purchase of eco-cars. (CY25=1) 16 Real private consumption 14 integrated estimates Real private consumption expenditure index Source: The Japan Research Institute, Ltd. based on the data of The Cabinet Office, The Ministry of Internal Affairs and Communications Housing starts are at a low level, although they have increased. Condominium sales continue to recover. (1, houses) 14 Housing starts (annualised, left scale) Condominiums sold (Metropolitan area, right scale, 6-month moving average) 11 (1, 1 units) Source: The Ministry of Land, Infrastructure and Transport, Real Estate Economic Institute Co., Ltd.. Monthly Report of Prospects for Japan's Economy July

3 Industrial production is on a recovery trend, while overseas demand continues to weaken Japan's economic activity is on a recovery trend in total, as shown in the fact that real GDP in the January-March quarter grew by 4.7 per cent, a higher growth rate, on a seasonally adjusted, annualised percentage change from the previous quarter basis. Although industrial production in April declined by.2 per cent over the previous month and the production forecast for May shows a decline of 3.2 per cent, it is predicted that industrial production in June will increase again, judging from factors such as deviation arising from seasonal adjustment and an improving trend seen in the diffusion index for future economic conditions in manufacturing in The Economy Watchers Survey. The contribution of overseas demand to the total economic growth rate has been limited. While exports have increased recently mainly driven by exports to the US, imports stay at a high level due to a rise in imports of crude oil and liquefied natural gas (LNG) for thermal power generation. As a result, net exports on a GDP basis continue to be at a low level. Figure 2-1 Contributions to Real GDP Change Rates <on a seasonally adjusted, annualised % change from the previous quarter basis> 外需 Overseas demand 官公需 Public demand 企業部門 The corporate sector 8 家計部門 The household sector 実質 Real GDP GDP Source: The Cabinet Office Figure 2-2 Industrial Production and The Economy Watchers Survey Results (CY25=1) 1 Industrial production index (left scale) Manufacturing production forecast index (left scale) 7 The Economy Watchers Survey (manufacturing, 65 the DI for future economic conditions, right scale) Source: The Ministry of Economy, Trade and Industry, The Cabinet Office Figure 2-3 Real Exports and Imports <seasonally adjusted> (CY25=1) Real exports 14 6 (left scale) Real imports (CY25=1) 4 8 (left scale) Real trade balance (1 billion 35 yen) (the index, right scale) Net exports on a GDP basis (value, right scale) (Y/M, Q) Source: The Ministry of Finance, The Bank of Japan, The Cabinet Office. Monthly Report of Prospects for Japan's Economy July

4 Government measures such as reconstruction have boosted domestic economic activity Domestic demand is firm, supported mainly by government measures. Restoration and reconstruction activity in the disaster-hit areas has been livening up since the start of the year, as shown in the fact that public investment in the January-March period increased over the previous quarter, for the first time in three quarters. Private consumption expenditure continues its solid trend as a whole, although the extent of improvement varies with products on sale. While automobiles have been doing well, supported by the government measures such as subsidies and tax cuts for the purchase of eco-cars, household electrical appliances have been weakening, led by stagnant sales of TV sets. Environments surrounding income, which is the source of private consumption expenditure, continue their improving tendency, as shown in the fact that total cash earnings saw a.8 per cent year-on-year increase in April, the third consecutive monthly rise. The CPI excluding fresh food (the core CPI) increased by.2 per cent year-on-year in April, the third successive rise, after the pace of decline had slowed gradually since the large fall in 29. Viewed by item, while petroleum products, fuel and lighting have boosted the core CPI due to the rise in energy prices, deflationary pressure arising from items such as household appliances and furniture on the core CPI persists. Figure 3-1 Contribution of Public Demand to Real GDP Change Rates <on a seasonally adjusted, annualised % change from the previous quarter basis> 公的在庫 Public inventories 公共投資 Public investment 政府最終消費支出 Government consumption expenditure 官公需寄与度 Contribution of public demand Source: The Cabinet Office. Figure 3-2 Total Cash Earnings <year-on-year % change> 現金給与総額 Total cash earnings 2. 定期給与 Contractual cash earnings 所定内給与 Scheduled cash earnings Source: The Ministry of Health, Labour and Welfare. Figure 3-3 The Core CPI <year-on-year % change> 食料 Food Fuel, lighting and 光熱 水道 water charges たばこ Cigarettes その他 Others コア Core CPI CPI 石油製品 Petroleum products Household appliances 家具 家電 and furniture 高校授業料 High school fees 米国型コア Core CPI the CPI US type Source: The Ministry of Internal Affairs and Communications. Note: The core CPI: excluding fresh food, The core CPI the US type: excluding food (excluding alcoholic beverages) and energy. Monthly Report of Prospects for Japan's Economy July

5 The effect of the slowdown in overseas economies would be limited The anxiety over a possible further slowdown in the US and Chinese economy is intensifying recently. However, as the situation where the US and Chinese economies falter considerably will likely be able to be avoided, the negative effect of the slowdown in overseas economies on Japan's exports and production is expected to be limited. As for European economies as a whole, it is projected that the real GDP change rate will see a negative figure again in the April-June period, due to austerity budgets, worsening employment and income environments, and so on. However, the direct negative effect of the deterioration in European economies on Japan's economy would be limited, because the share of exports to the EU in Japan's total exports is smaller than that of exports to the US or China on a value basis. Also, the indirect downward pressure of the slowdown in China's exports to the EU, which have a large share in China's total exports, on Japan's exports to China would be limited, because a considerable deceleration in the Chinese economy will be able to be avoided as long as European economies do not fall into a deep recession. However, fears stemming from the European debt crisis persist, such as the uncertainty as to the bail-out programmes in Greece and the anxiety about the financial system in Spain. If the crisis deteriorates significantly, its negative effect on Japan's economy will not be small Figure 4-1 The Leading Economic Index and Real GDP in the US (CY25=1) Real GDP 11 (the index, left scale) 15 (CY25=1) 1 The leading economic index 95 (3-month advance, right scale) (Y/M, Q) Source: The Conference Board, US Bureau of Economic Analysis Figure 4-2 China's CPI and Reserve Requirements on Deposits 1 8 CPI (year-on-year % 28 6 change, left scale) Reserve requirements on deposits 2 6 (at the end of month, right scale) Source: The National Bureau of Statistics of China, The People's Bank of China China's exports to the EU (Y/Y %) Figure 4-3 GDP Growth Rate in the Eurozone and China's Exports to the EU <year-on-year % change> Forecast of GDP growth rate in the eurozone (CY212:+.6%) Nominal GDP growth rate in the eurozone(y/y %) Source: Eurostat, Statistics of China Customs. Monthly Report of Prospects for Japan's Economy July 212

6 Reconstruction demand would continue to materialise in earnest Thus far, the government has budgeted a total of about 18.5 trillion yen related to restoration and reconstruction from the disaster, about 11.5 trillion yen of which is estimated to be counted as the amount which can boost the real GDP growth rate directly as "reconstruction demand". Restoration and reconstruction activity in the disaster-hit areas has been materialising in earnest due to the effects of the related budgets. The index of supply for public investment in the indices of all industry supply, which show which sort of demand is met by the supply of a certain item among goods and services in various industries, increased for three consecutive months, reflecting the increase in supply of buildings in the construction industry. Looking ahead, as the pace of increase in the value of contracts for public works, which is considered to be a leading indicator for public investment, has been accelerating recently, it is expected that public investment on a GDP basis will continue to increase in the April-June period. On the other hand, an insufficiency of workers for public works in the disaster stricken areas has been a bottleneck to the restoration and reconstruction. It is worrisome that this obstacle could delay the materialisation of reconstruction demand in earnest. Figure 5-1 Estimate of Reconstruction Demand (Trillion yen) The first The second The third The fourth The draft supplementary supplementary supplementary supplementary budget for budget in budget in budget in budget in FY212 FY211 FY211 FY211 FY211 Total Government consumption expenditure.5..8 Note.7 2. Figure 5-2 Indices of All Industry Supply <seasonally adjusted> 公共投資 Public investment (CY25=1) 85 建設業 The construction ( 構築物 industry ) (buildings) 8 Figure 5-3 The Value of Contracts for Public Works and Public Investment on a GDP Basis Nominal public investment GDP (on a 名目公共投資 GDP basis, right ( 右目盛 scale) ) (Trillion yen) The value of contracts for 公共工事請負金額 (Trillion yen) public works (left scale) Public investment Note Grants, reserves, etc Note Total Note Source: The Japan Research Institute, Ltd. based on the data of The Ministry of Finance. Note: The fourth supplementary budget is not related to reconstruction Source: The Ministry of Economy, Trade and Industry Source: The Japan Research Institute, Ltd. based on the data of The Cabinet Office, East Japan Construction Surety Co., Ltd., and so on. Monthly Report of Prospects for Japan's Economy July

7 Persistent downward pressure on corporate profits Based on Financial Statements Statistics of Corporation by Industry, Quarterly, prepared by the Ministry of Finance, both sales proceeds and current profits increased year-on-year in the January-March period, for the first time in four quarters. Looking at contributing factors to the yearon-year change rate in current profits, the reduction in fixed costs such as personnel expenses boosted the rate of increase in current profits, while the contribution of the rise in sales proceeds seems to have been limited. As for continued severe environments surrounding corporate profits, it can be pointed out that the continued strong yen is one of the backgrounds. The exchange rates of the yen against the US dollar and the euro, where correction to their highly appreciated level had taken place after the start of this year, have risen again, reflecting heightened anxiety over the European debt crisis and uncertainties surrounding the prospects for the US economy. It is considered that the continued strong yen reduces corporate profits in total ultimately through a subsequent decrease in export quantity and negative ripple effects between industries, although a certain sort of industries do have exchange-margin profits due to the price effect. Based on the JRI macro model simulation, it is calculated that current profits of Japanese non-financial enterprises would decline by 3.9 per cent in FY212 and 6.8 per cent in FY213, if the yen appreciates by a further 1 per cent against the US dollar from the base line (main scenario) exchange rate in FY212 (83 yen / dollar). Figure 6-1 Current Profits of All Industries excluding Financials <year-on-year % change> その他固定費要因 Other fixed costs 人件費要因 Personnel expenses 変動費要因 Variable costs 売上高要因 Sales proceeds 経常利益 Current profits total Source: The Japan Research Institute, Ltd. based on the data of The Ministry of Finance. Figure 6-2 Exchange Rates of the Yen and Assumed Exchange Rates by Japanese Enterprises (Yen) Yen / US dollar (left scale) Yen / Euro (right scale) 為替レート Exchange rates of the yen 企業想定為替レート Assumed exchange rates ( 同年度 by ) enterprises for the fiscal year yen appreciation 95 11/ /1 4 (Y/M, Q) Source: The Bank of Japan, Nikkei QUICK (Yen) Figure 6-3 Estimate of Effect of Change in Yen Exchange rate on Corporate Profits 1 The 年目 first year 2 The 年目 second year yen appreciation yen depreciation +1% +5% 5% 1% The rate of deviation from the base line (main scenario) yen / dollar exchange rate in FY212 (83 yen / dollar) Source: The Japan Research Institute, Ltd. based on the data of The Ministry of Finance. Monthly Report of Prospects for Japan's Economy July 212

8 The risk of the shortage of electric power supply remains in the Kansai region The government decided in June that the Oi nuclear power plant of The Kansai Electric Power Co. be restarted. As a result, it is expected that the supply-demand situation in electric power this summer in the Kansai region will improve considerably due to the restart. However, it is worrying that it will take some time for the plant to enter into full operation. In addition, if this summer has a heat wave similar to that in 21, it is possible that planned rolling blackouts could be implemented in order to prepare for the unexpected. If the electric power shortage is realised and planned rolling blackouts are enforced, electricity savings and cuts in electric power could curb the production activity in the region. It is considered that the shortage of electric power supply will have more significant negative effects on the Kansai region, in which manufacturing has a larger share in the total, than on the Kanto (Metropolitan) region. The level of production activity in the Kansai region has declined due to the slowdown in emerging economies and the strong yen. In addition, it is difficult for the benefits stemming from restoration and reconstruction from the earthquake and tsunami disaster to reach the region, in contrast to the Tohoku and Kanto regions. Therefore, it is more worrisome that tight electricity supply could curb the economic activity in the Kansai region further. Figure 7-1 Forecast of Supply-demand Situation in Electric Power This Summer in the District of the Kansai Electric Power Co. (1,kW) 3, 2,5 2, 1,5 1, 5 Forecast of maximum electricity demand this summer, taking electricity saving into account :29.87 million kw In case that the Oi nuclear power plant will not be restarted be restarted (25.42 million kw) (29.88 million kw) 融通など supply from other electric power companies 揚水 power generation with pumped-up water 原子力 nuclear power generation 水力 hydroelectric power generation 火力 thermal power generation Source: The Kansai Electric Power Co., Inc., The National Policy Unit. Figure 7-2 Demand for Electric Power in Large Scale and Industrial Production Industrial production index (CY25=1) The Kinki region (The Kansai Electric Power Co., Inc.) y = x R 2 =.4923 y = x R 2 =.4421 The Kanto region (The Tokyo Electric Power Co., Inc.) Electric power sold to largescale users (1 million kwh) Source: The Ministry of Economy, Trade and Industry, The Federation of Electric Power Companies of Japan Figure 7-3 Industrial Production Index by Region <seasonally adjusted> (the peak before the quake and tsunami disaster = 1) 九州 Kyushu 東海 Tokai 東北 Tohoku 近畿 Kinki (Kansai) 関東 Kanto Source: The Ministry of Economy, Trade and Industry. Monthly Report of Prospects for Japan's Economy July 212

9 Private consumption expenditure could weaken after this autumn Almost all of the cooling of consumer sentiment arising from the earthquake and tsunami disaster has dissolved in recent months. In addition, as for environments surrounding income, which is the source of private consumption expenditure, scheduled cash earnings saw a year-on-year increase in two consecutive months. It is expected that income environments will continue to improve, because of the rise in industrial production, reflecting a materialising in earnest of reconstruction demand from the disaster. Automobile sales, which have contributed to boosting private consumption expenditure considerably, continue their increasing trend, supported by the government measures such as subsidies and tax cuts for the purchase of eco-cars. However, it is very likely that the budget of subsidies for the purchase of eco-cars will run out well before the end of the programme set at the beginning. It is estimated that the subsidy programme will come to an end by this August, on the assumption that the pace of car sales after January would continue from May onwards. After the end of the subsidy programme, automobile sales are predicted to decline significantly in the same way as the last time such a subsidy programme was carried out. Accordingly, it is worrisome that private consumption expenditure could weaken after this autumn. Figure 8-1 Industrial Production and Scheduled Cash Earnings <year-on-year % change> Figure 8-2 Automobile Sales by Type of Tax Reduction <seasonally adjusted> Figure 8-3 Estimate on Remaining Budget Amount of Subsidies for Eco-cars 4 Industrial production (left scale) 2. 3 Forecast (1, cars) 免税 tax free % % 減税 tax reduction 5% 5% 減税 tax reduction 減税対象外 fully taxable (1 million yen) 3, Estimate 2,5 2, 1,5 Simulation (on the assumption that the pace of car sales after January would continue during the simulation period) , 2 3 Scheduled cash earnings (right scale) Source: The Ministry of Economy, Trade and Industry, The Ministry of Health, Labour and Welfare Source: The Japan Research Institute, Ltd. based on the data of The Japan Automobile Manufacturers Association Inc / Source: The Japan Research Institute, Ltd. based on the data of Japan Automobile Dealers Association, Japan Mini Vehicles Association, and so on. Monthly Report of Prospects for Japan's Economy July

10 The increase in the financial burden on households could weigh on consumption It is highly likely that the financial burden on households will rise because the government is expected to have to increase revenues for the reconstruction from the disaster as well as the rebuilding of public finance. As the period during which the income tax is raised for reconstruction was decided to be 25 years, the financial burden on households per year will be light. However, the abolition of tax exemptions for dependents which will be used as the revenue for child allowances, and a rise in pension premiums will be a heavy financial burden on households. As a result, net benefit to households in FY212 is expected to decrease by about one trillion yen from the previous fiscal year. The decrease in net benefit is predicted to be a downswing factor to private consumption expenditure through a decline in disposable income of households. The JRI macro economic model simulation shows that a decrease in disposable income by one trillion yen will lower private consumption expenditure ultimately by 7 billion yen. Meanwhile, the government and the DPJ decided that the consumption tax rate will be raised to 8 per cent in April 214, and submitted the related bills to the Diet. Due to this tax rise, it is likely that a rushed increase in demand for housing and durable consumer goods in the main will boost GDP growth in the second half of FY213 considerably. On the other hand, it is predicted that an increase in prices caused by the rise in the consumption tax rate will lower private consumption expenditure in real terms through a decline in the purchasing power of households. Figure 9-1 Financial Burden on and Benefit to Households (Trillion yen) (FY) 子ども手当 Child allowances Free of charge 高校授業料 public high schools House-to-house Cuts in tax exemptions 農業戸別補償 compensation to farmers 扶養控除 for dependents Tax rises for 復興増税 reconstruction ネット受取 Net receipts Source: The Japan Research Institute. Rises in pension 年金保険料 premiums (Trillion yen) Figure 9-2 The Effect of Decrease in Disposable Income by One Trillion Yen <annualised> <macro economic simulation> The first year The second year The third year 個人消費 Private consumption expenditure GDP GDP Source: The Japan Research Institute Figure 9-3 Household Expenditure Before and After the Rise in Consumption Tax Rate < > (Peak = 1) 1 3% 5% 住宅着工戸数 Housing starts 耐久財消費 Durable consumer goods Source: The Cabinet Office, The Ministry of Land, Infrastructure and Transport. Monthly Report of Prospects for Japan's Economy July 212

11 Prospects for Japan's economy - Projected real GDP change; 2.3% in FY212 and 1.5% in FY213 (1) Japan's real GDP grew by 4.7 per cent in the January-March quarter this year on a seasonally adjusted, annualised percentage change from the previous quarter basis (the second preliminary estimates). In the following first half of FY212 starting in April, it is predicted that favourable factors such as a rise in public demand and housing investment reflecting a materialising in earnest of demand stemming from reconstruction, and an increase in private consumption expenditure supported by the government measures for the purchase of eco-cars, will continue to contribute to boosting economic activity. (2) However, it is very likely that the budget of subsidies for the purchase of eco-cars will run out by this summer. As a result, it is expected that automobile sales in this autumn will decline significantly. Accordingly, the real GDP growth rate in the October-December period is estimated to be near zero due to the decrease in private consumption expenditure. It is predicted that the lower real GDP growth rate will continue on a quarterly basis through the first half of FY213, under the circumstances that overseas demand will not be able to be counted as a strong driving force for the economy, that the autonomous power of economic recovery will continue to be weak, and that the boosting effect of reconstruction demand on the economy will peter out. (3) On the other hand, in the second half of FY213, it is projected that a rushed increase in demand for housing and durable consumer goods will boost the quarterly real GDP growth rate considerably, before a rise in the consumption tax rate to eight per cent which is expected in April 214. (4) During the projection period, it should be noted that there are downside risks to the economy, such as a worsening of the European debt crisis, a further slowdown in emerging economies, an advance in the strong yen, the tighter supply-demand situation in electric power, and so on. (5) As for the Consumer Price Index excluding fresh food (the core CPI), the deflationary pressure will persist, as shown in the declining trend in prices of household appliances and furniture, although energy-related prices are expected to rise. Monthly Report of Prospects for Japan's Economy July

12 Figure 11 Projections for GDP Growth and Main Indicators of Japan ( as of June 8, 212 ) (seasonally adjusted, annualised % changes from the previous quarter) CY212 CY213 CY214 1~3 4~6 7~9 1~12 1~3 4~6 7~9 1~12 1~3 FY211 FY212 FY213 (Actual) (Projection) (Projection) (Projection) (Actual) (Projection) Real GDP Private Consumption Expenditure Housing Investment Business Fixed Investment Private Inventories (percentage points contribution) ( 1.3) (.2) (.1) (.1) (.1) (.1) (.) (.) (.) (.4) (.2) (.1) Government Consumption Expenditure Public Investment Net Exports (percentage points contribution) (.5) (.4) (.2) (.2) (.2) (.2) (.3) (.1) (.1) ( 1.) (.2) (.2) Exports of Goods and Services Imports of Goods and Services (% changes from the same quarter of the previous year) Real GDP Nominal GDP GDP deflator Consumer Price Index (excluding fresh food) Industrial Production Index Unemployment Rate Current Account Balances (trillion JY) Share of Nominal GDP Exchange Rates (JY/US$) Import Price of Crude Oil (US$/barrel) Source: The Cabinet Office; The Ministry of Internal Affairs and Communications; The Ministry of Economy, Trade and Industry; The Ministry of Finance. The projection figures are based on those of The Japan Research Institute, Ltd. Note 1: " " indicates minus. 2: It is assumed that the consumption tax rate will be raised from 5% to 8% in April : The assumptions on the real GDP growth rates in CY212 in major overseas economies: the US 2.1%, the euro area.5%, China 8.2%. Monthly Report of Prospects for Japan's Economy July