Thomson Reuters reported on March 17, 2014 that the Japanese government has upgraded its view on factory output, while leaving its overall economic assessment unchanged. The recent data on machinery orders, production data have all been quite positive, thanks to a weakening Japanese Yen currency. However, it remains uncertain whether the upcoming consumption tax hike starting in April will have an adverse impact to the economy.
The government released its monthly report on Monday, which described the economy as “moderately recovering”, which was in line with the tone taken by the Bank of Japan (BOJ). However, without examining the effects of the post consumption tax increases in April, I believe that it is still difficult to tell whether the views expressed by the Japanese government are premature.
The assessment of the Japanese economy was based on several economic data which points to potential economic growth ahead including corporate earnings, factory output, industrial production, retail sales, among others. However, the government was less upbeat about the state of the housing sector, where it is currently forecasting growth to slow down with the last-minute boom slowly tapering off. The housing construction sector was previously cited by the government as booming, as most of the home builders are rushing to beat the sales tax hikes. The less upbeat view on the housing construction sector may have been concentrated on certain regions, but I believe that with the upcoming Tokyo Olympics in 2020, coupled with the shortage of permanent housing in the Tohoku region around Sendai/Fukushima prefectures following the devastating earthquakes in March 2011, the housing sector will not be facing any shortage of demand. There could be difficulties in hiring construction workers needed to work on these projects due to the tough immigration restrictions imposed in Japan, however, there could be relief coming in June when Prime Minister Shinzo Abe is expected to announce a comprehensive plan for immigration reforms in the country to spur growth, and gradually resolve the aging population issues.
As for Japanese exports, the Japanese government is also taking on a similar view expressed by the Bank of Japan (BOJ) that the sector continues to be exposed to emerging market risks, but with the growth expected to be derived from developed economies such as the United States, and the Euro Zone regions, exports to these countries, coupled with a weakening Japanese Yen currency, might offset some of the potential negative effects coming from the consumption tax hikes in April. In fact, recent data for the month of February 2014 showed that total exports rose by less than expected 9.8 percent, while imports rose by 9.0 percent, leading to an overall trade deficit of Japanese Yen 800.3 billion. Automobile exports which have played a key role in driving the overall exports growth, have largely been offset by the rise in imports of crude oil, natural gas, and other fuel related products in order to cope with the shortfalls in electricity generating demand following the March 2011 Fukushima nuclear plant disaster
The government has urged BOJ officials to do more in reviving inflation growth. Although core consumer inflation levels have been unchanged at 1.3 percent in February, there have been views expressed by many investors who are questioning whether the 2.0 percent inflation target will be achieved by the second half of 2015, and should the BOJ adopt a flexible target which is realistic, and achievable. However, BOJ officials continue to stick to the line of 2.0 percent inflation target, and will not waiver despite the criticism. It does show some monetary discipline exercised by the BOJ, and does not want the financial markets thinking that monetary policies in Japan are uncertain, and prone to changes.
The latest monthly economic report released by the Japanese government might be timed to psych up the overall investors’ thoughts that ‘Abenomics’ is really working at all fronts, however, there is still some amounts of scepticism on the relative success of ‘Abenomics’ despite the initial spurt in growth following the appointment of the current administration. The months ahead, post April’s consumption tax hikes, could be seen as critical in getting an accurate assessment of the overall state of the Japanese economy. The relative success of the economic policy goals set out by Prime Minister Abe and his cabinet will be put to tough scrutiny in the months ahead.