The outlook for the Japanese economy, the world’s second largest and still a vital one for Australia, isn’t looking too flash.
The American influence is there: the near recession is crimping Japanese exports and that is having a knock on effect on employment and demand.
That saw a decidedly gloomy set of figures this week on growth, exports, production and inflation and forced the Bank of Japan to leave interest rates out of its latest economic outlook, which is a sign of how unpleasant conditions are becoming.
And the already high level of consumer inflation will be further boosted by the restoration on the same day of a petrol tax that was allowed to expire a month ago because of opposition from the Fukuda Government’s opponents who would not allow its renewal. It is a ‘temporary tax’ that is been ‘temporary’ for around 34 years!
That the Government restored the 25.1 yen/litre tax in the midst of the Golden Week holidays, when many people use their cars extensively, says a lot about the stumbling nature of the Fukuda Government which cannot come to grips with the economy. The tax was applied to petrol prices as of yesterday, meaning there was only one month of lower fuel costs for drivers.
The same political stand-off forced the Bank of Japan to remain leaderless for a week or so while the Government and opposition parties haggled over possible replacements. One was found and the bank got down to finalising its outlook which, looking at the economy isn’t promising.
Japanese industrial output fell 3.1% in March, according to figures out this week.
That was the biggest monthly fall for at least five years and far below market median forecasts. Economists said this reflected a slowdown in export orders, especially from the US and Asia which revealed itself in export figures for March. Industrial production had risen 1.6% in February, so the slum was substantial.
Seasonally adjusted unemployment eased to 3.8% in March, but there are now fewer jobs for jobs seekers to find, and the ratio keeps dropping and has been doing so for 10 months. That’s a sign employers are cutting back in the face of declining orders.
Overall household spending fell 1.6% in March from a year earlier in price-adjusted real terms, core inflation though hit an annual rate of 1.2% in the year to March.
That tiny increase was the first sign of inflation at the core measurement level for a decade, so that’s good news because the one thing Japan needs is a resurgence of controlled price pressures, which might break the long deflationary cycle that has depressed consumer spending.
That’s not to say inflation at the headline level isn’t a problem: thanks to sharp rises in fuel and food prices it is, but they are stripped out in the core measurement and that reflects the cost cutting, lower wages and other depressing factors in this huge economy.
Housing starts in Japan fell 15.6% in March from a year earlier, below the market forecast for a 6.7% fall. Normally a 6.7% fall would be bad news, but because of changes to regulations last year after a scandal involving the certifying of thousands of homes and buildings, there has been a backlog of approvals for new homes. That had been showing signs of improving in recent months until March’s fall.
So what did the Bank of Japan outlook say?
The central bank trimmed its growth forecast; predicted inflation would rise and didn’t mention raising interest rates for the first time in two years.
It saw growth at 1.5% in the year ending March 31, 2009, less than the October estimate of 2.1%.
The bank wrote: "The outlook for economic activity and prices is highly uncertain. It is not appropriate to predetermine the direction of future monetary policy".
So the main official rate was left unchanged on 0.50% and the expectation was also left that even if inflation rises further, rates will not be increased.
With a firm yen a worry for many in business that will be pleasing news, especially with those falls in export demand and the drop in industrial production.
Consumer price inflation was forecast to grow faster than predicted six months ago. Core consumer price inflation will rise at an annual rate of 1.1%, up from the October forecast of just 0.4%.
In the March 2010 year, the central bank forecast growth to be 1.7% and core prices to rise by 1.0%. But these are only rough estimates.
The way the prices of commodities have swing in the past year, prices could be much stronger, or a touch weaker. Certainly the rise in costs for steel and metals from the big raw material price rises now being negotiated will have an impact on producer prices later this year, and then on the cost of products like cars and whitegoods.
The central bank said it has kept the main interest rate steady since raising it in February of last year, because risks including higher energy costs and a domestic housing slump created "uncertainty” in the economy.
In contrast to the sluggish level of exports and production in Japan, in nearby South Korea it was a very different story.
South Korean exports in April jumped 27% (annual rate) compared to April 2007, thanks to rising demand from developing economies, such as China (Japan’s exports in March dropped sharply from February, especially to China).
The performance in April exports was the fastest since a 28.8% annual rise in August 2004. It was well above market forecasts.
April’s kick higher came after an 18.6% annual rate in March and a similar figure for February.
Imports continued to rise strongly in April: up at an annual rate of 28.6% compared to the 25.8% rate in March.
The Government said the country posted a trade deficit of $US46m in
