Japan Economics Weekly

Japan Economics Weekly

Omicron restrictions wouldn’t jolt BoJ into action

Even if Omicron proves more transmissible than Delta, its impact on Japan’s economy could vary substantially depending on how deadly it is, how well it evades vaccines, and PM Kishida’s appetite for draconian containment measures. With supply shortages already severe, fresh restrictions on Japanese manufacturers’ global supply chains coupled with a global shift in spending away from services and back towards goods could cause input price pressures to intensify further. However, we doubt any resulting boost to core goods inflation would do much more than simply offset a drag from energy inflation. As such, core inflation would stay well short of the BoJ’s 2.0% target, keeping rate hikes off the table.

3 December 2021

Japan Economics Weekly

Government seeks to revive soggy chip industry

The breakdown of PM Kishida’s new supplementary budget released today showed that ¥600 billion has been allocated to reviving semiconductor manufacturing in Japan. The centrepiece of the plan is a new TSMC factory in Kumamoto Prefecture that will produce the mid-range chips critical for car production. Given recent supply disruptions caused by chip shortages, beefing up local production makes strategic sense. We think the government’s new interventionist approach to stimulating mid-range chip production may succeed, but plans to make inroads into high-range chip production are likely to fall flat.

26 November 2021

Japan Economics Weekly

Stimulus package large but smaller than reported

The stimulus unveiled today by PM Kishida’s new cabinet was broadly in line with expectations despite inflated headline figures quoted in media reports which we think are padded with loans and recycled funds. There was a case for the package to focus on long-term structural goals such as digitalisation and decarbonisation, as last year’s third supplementary budget did. But instead the new stimulus is geared towards propping up households and business with handouts. While that will give a boost to consumption, spending would be on course for a strong rebound in Q4 and Q1 even without any fiscal handouts. Despite today’s large package, unveiled spending this year is only around half of the spending announced in 2020. But given that government spending will still be far higher than 2019 levels this year, we’d still characterise fiscal policy as expansionary.

19 November 2021
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Japan Economics Weekly

More cash handouts on the way

The latest survey data suggest that consumer spending is still struggling to gain momentum even as the bulk of the population are fully vaccinated and virus cases have plunged. However, with car sales now rebounding sharply as supply disruptions are easing and spending set to get another shot in the arm from the government’s cash handouts, we still expect consumption to surpass its pre-virus level by early next year.

Japan Economics Weekly

PM Kishida’s plans to raise wages sound familiar

PM Kishida’s plans to lift wage growth largely follow the Abenomics blueprint of tax incentives, targeted pay hikes in sectors facing severe labour shortages and rapid minimum wage hikes. A tax on corporate cash holdings would be a novelty, but we suspect that firms would respond by diverting their cash into other financial assets or raising dividend payouts rather than by lifting wages. Unfortunately, Kishida is showing little appetite for putting his money where his mouth is by providing generous across-the-board pay hikes for public sector workers.

Japan Economics Weekly

Services recovering, industry still ailing

This week’s activity data provided further evidence that supply shortages in the car sector are holding back the recovery. We expect car production to rebound this quarter as factories in Southeast Asia are reopening, but lingering chip shortages will remain a drag. As such, the onus rests on the services sector to drive the recovery for now, which is being supported by the end of curfews at bars & restaurants and should soon get an additional shot in the arm by the resumption of the Go To Travel campaign.

Japan Economics Weekly

Carmakers will struggle even after shortages abate

The disruptions to supply chains from Delta outbreaks across Southeast Asia that resulted in another big drop in car exports in September will ease soon. However, carmakers are responding with lower capital spending and are lagging their US and European counterparts in electric vehicle sales. The upshot is that the sector won’t return to former glory.

Japan Economics Weekly

Kishida dissolves parliament, firms look to seniors

The ruling LDP appears to be bracing for a slimming down of its lower house majority in the general election that will take place on 31st October. That would make tangible structural reform progress under PM Kishida even less likely. And while a large fiscal stimulus package will be compiled immediately after the election, it’s likely to sustain the elevated fiscal support of the past year rather than act as a fresh driver of growth. Meanwhile, firms appear to be readying themselves for renewed labour shortages once the economy reopens by drawing up plans to re-employ more seniors. We expect further increases in over-60s employment to drive labour force participation higher over the next few years.

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