A Natural Recovery for the Japanese Economy
Nippon Steel & Sumikin Research Institute Corporation
The Japanese economy has continued to recover since the end of last year, not so much as a result of Abenomics as a straight manifestation of the natural recovery power of the Japanese economy following the bottoming-out of exports. With a tighter labor supply pushing up wages, moreover, that autonomous recovery should continue.
The Japanese economy was forced into a slight recession from spring through winter last year due to the decline in exports to China in particular. However, with personal consumption remaining firm and exports bottoming out, the economy too bottomed out in November 2012, and has maintained a steady recovery trajectory overall across the first half of FY2013. Moreover, the pace of that recovery is picking up on the back of the February 2013 supplementary budget and a last-minute surge in demand ahead of the consumption tax hike in April 2014.
Personal consumption has been unexpectedly strong. For example, since April, passenger vehicle sales have been around the 4.5 million unit mark on an annualized basis, holding above the 4.4 million units for FY2012, while there has also been an upturn in chain store sales, which indicate consumption trends for basic commodities such as food. On top of this, previously restrained service-related and high-end consumption is becoming much more active. Room occupancy rates for city hotels are now close to levels last seen in the bubble economy period at the end of the 1980s, and the number of domestic tourists is expected to rise around 10 percent year-on-year for the summer of 2013. Consumers on the rebound from a long period of economizing are increasingly looking to take their consumption up a level in areas such as eating out and services. This robust personal consumption has been underpinned by an upturn in the employment environment. The unemployment rate dropped to 3.9 percent in June, the first time it has undercut four percent since October 2008. Labor supply is tightening amidst an ongoing decline in the labor force as the baby-boomer generation moves completely into retirement, even as companies-particularly in the service industry-expand their payrolls. As a result, while wages remain relatively flat, lack of concern over employment prospects means that people are able to consume.
Next, where housing starts plummeted temporarily to an annualized 700,000 following the Lehman shock, they picked up in the first half of 2013 to reach an annualized 950,000. The increase has been particularly marked for built-for-sale houses ahead of the consumption tax hike. Owner-occupied and rental housing starts that were postponed after the Lehman shock have been booming alongside heightened expectations of economic recovery. Capital investment, on the other hand, has picked up in non-manufacturing industries thanks to stronger personal consumption but remains sluggish in the manufacturing industry. In the case of the non-manufacturing sector, more robust personal consumption and a recovery in profits saw store establishment notifications under the Act on the Measures by Large-Scale Retail Stores for Preservation of Living Environment return to pre-Lehman shock levels, while convenience stores too are increasing at an annualized rate of over 2,000. Further, automated warehousing demand in response to Internet sales growth has resulted in more active warehouse construction. However, the manufacturing industry's capital investment is recovering only slowly due to factors such as the ongoing decline in exports up to the end of December, lingering excess plant capacity, and the expected powering-up of capital investment tax incentives in FY2014.
With exports to China finally ceasing their downward slide and exports to the US continuing to recover, overall exports have bottomed out and are now heading toward recovery. However, despite rapid yen depreciation, they remain relatively flat because of ongoing economic sluggishness in Brazil, Russia, India, China and the euro zone, as well as the diminishing impact of yen depreciation. The latter is the result of increasingly stringent transfer pricing taxation. The transfer price is the price applied to transactions between affiliated companies such as parent companies and their offshore subsidiaries. Because the level at which this price is set impacts heavily on the profits of both parties, tax authorities have become very sensitive to transfer price setting standards, and it is not unusual for companies to engage in prior consultation with tax authorities over their transfer price setting methods and other issues. Consequently, while the weaker yen may have given Japanese parent companies room to lower their dollar-denominated export prices, the Japanese tax authorities may potentially refuse to let them do so. Companies dealing with businesses overseas with whom they have no capital relationship can set their export prices as they see fit, but transactions between parent companies and subsidiaries have recently been sitting at around 50 percent of export transactions, reducing the impact of yen depreciation on exports. Because some 90 percent exports to the US in particular comprise transactions between parent companies and subsidiaries, a weak dollar and a strong yen have little impact on US-bound exports.
As seen above, the recovery experienced by the Japanese economy in 2013 has been not so much as a result of Abenomics as a straight manifestation of the natural recovery power of the Japanese economy following the bottoming-out of exports. While the effects of approximately five trillion yen in additional public works investment will undoubtedly solidify in the coming months, with the weaker yen failing to push up exports and export firms showing no interest in capital investment, aggressive monetary easing in the form of massive JGB purchases has not produced any marked results for the real economy. Conversely, yen depreciation could be seen as impacting negatively on personal consumption because of the rise in food and energy prices. Looking at high stock prices too, while department store sales of luxury goods are certainly increasing, given that the extent of the increase is only around 50 billion yen, this can hardly be what is underpinning personal consumption as a whole, even including luxury good sales in other areas.
Looking ahead at the prospects for the Japanese economy, the consumption tax hike in the first half of FY2014 will cause a temporary slowdown, but after that, the rally in personal consumption and the ongoing gradual recovery of capital investment and exports is highly likely to produce stable domestic demand-led growth in the one-percent range. The Japanese economy has had two chances to make the transition to stable growth since entering the 2000s, but two major external shocks-the Lehman shock and the Great East Japan Earthquake-pushed it back into recession. This time, while the consumption tax hike could potentially hamper the transition to stable growth, the transition should ultimately succeed for three reasons. Firstly, the falling unemployment rate will place wages on a gentle upward trajectory. Secondly, where necessary, the government will roll out a flexible economic policy response, including additional supplementary budgets. Finally, while instability remains in China and other newly emerging countries, it is difficult to imagine any steep dive in economic conditions abroad.
(original article : Japanese)