Japan economy seen firm despite slowing exports
Japan’s economic expansion may lose pace in the coming months largely due to a slowdown in exports, but a rebound in consumption and robust corporate capital outlays will underpin growth, economists say.
By Agencies |
TOKYO: Japan’s economic expansion may lose pace in the coming months largely due to a slowdown in exports, but a rebound in consumption and robust corporate capital outlays will underpin growth, economists say.
Price conditions, however, remain weak despite a tighter labour market, supporting the view that the Bank of Japan will be in no hurry to raise interest rates. “The speed of economic expansion will likely slow temporarily, most notably through production as the US economy slows and firms adjust inventories,” said Takuji Aida, chief economist at Barclays Capital.
The economy expanded by an annualised 5.5% in October-December, marking the fastest growth in three years. While the economy may go through a soft patch, economists expect it to grow around 2% in 2007. Japan’s current economic recovery, which is in the longest post-war growth cycle since early 2002, has recently been led by domestic demand such as persistently strong capital spending. Still, overseas demand, especially from the US — Japan’s largest export destination — holds the key to the nation’s export-dependent economy.
“Although the US economy is expected to avoid the worst case scenario, growth in (Japanese) exports is losing momentum, resulting in lower economic growth,” said Takeshi Minami, chief economist at Norinchukin Research Institute. The Bank of Japan’s quarterly tankan survey of business sentiment showed last week the key index for big manufacturers fell for the first time in a year, although it was still just below a two-year high hit in the previous survey.
“The biggest reason behind the fall in the business sentiment diffusion index has probably been a slowdown in exports,” said Takahide Kiuchi, senior economist at Nomura Securities. In the survey, big manufacturers forecast 1.7% growth in export revenues for the current fiscal year started in April. That compared with a 2.3% rise seen for the last fiscal year in the March 2006 tankan survey.
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Japan’s economic recovery has often faltered due to a global economic slowdown, but economists say it has become more resilient thanks to upbeat investment plans and a pick-up in non-manufacturing sectors. Ryutaro Kono, chief economist at BNP Paribas, said that non-manufacturers’ capital outlays could exceed those of manufacturers this fiscal year. Non-manufacturers are often seen as more closely linked to domestic demand. Recent data also showed that industrial production fell by a less-than-expected 0.2% in February from a month ago and manufacturers’ output is seen growing in March and April, feeding expectations that a slowdown in output will be only temporary.
Personal consumption, which accounts for about 55% of the economy and has been seen as the weakest link in the current recovery, is also showing signs of improvement. The government’s composite index for personal consumption last week showed an average 1.1% growth for January and February, higher than a 0.9% rise in the previous quarter.
Hiromichi Shirakawa, chief economist at Credit Suisse, said the firm reading suggested that the consumption component in January-March gross domestic product may become as strong as a 1% q-o-q rise in the last quarter of 2006. Recent government data showed house hold spending rose 1.3% in February from a year ago, after reversing 12 consecutive months of y-o-y decline in January.
But wages are under pressure. Recent data showed wage earners’ cash earnings were down 0.7% in February from a year ago, the third straight month of decline. Against this background, inflationary pressure remains weak in Japan, with core consumer prices falling by 0.1% in February from a year earlier, the first drop in 10 months.
Economists expect the weakness in consumer prices to continue into the second half of this year. That will likely keep the pace of future BoJ rate hikes very slow, and many now expect the central bank to hold off from raising rates until after July. In February, the BoJ raised its key overnight call rate target by a quarter percentage point to 0.5%.
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