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Reopening could be a damp squib

With all domestic restrictions gone and the booster rollout further severing the link between cases and deaths, the conditions for a reopening bounce are in place. Moreover, consumers have ample room to splash the cash. The household savings rate remained far higher than in most other advanced economies at 9% in Q4. However, since the initial Omicron wave subsided timely data suggest that consumers are keeping their purse strings tight. While admittedly not the best guide to actual spending, Google data on the number of people at retail and recreation facilities show mobility not much higher than this time last year. And online restaurant views were still a huge 64% down on 2019 levels in the first week of April, hinting that face-to-face services spending hasn’t rebounded much yet. Add to those disappointing early signs the fact that the government hasn’t ruled out responding to future waves with yet more restrictions and the risks to our forecast for a cumulative 4% q/q rise in private consumption across Q2 and Q3 are firmly to the downside.
Tom Learmouth Japan Economist
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Japan Economics Weekly

Demographic woes persist, tourists waiting at the gate

An exodus of long-term migrants contributed to the 0.6% fall in Japan’s population last year but with border controls loosened since March net migration is bouncing back strongly. Even so, we still see GDP growth settling around 0.5% over the longer-term as a shrinking workforce offsets productivity gains. Meanwhile, Japan remains a highly popular tourist destination and once the onerous procedural requirements for entry are lifted, probably sometime in Q4, tourist arrivals and spending should rebound strongly.

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10 August 2022

Japan Chart Book

Output will return to pre-virus trend eventually

With a record virus wave sweeping across the country and consumer confidence slumping, we’re slashing our forecast for Q3 consumption growth from 0.8% to 0.2%. While the government has refrained from declaring another state of emergency, spending was weakening even before virus cases started to surge. That means that GDP will remain much weaker in the near term than the pre-pandemic trend, forcing the Bank of Japan to keep policy loose even as central banks elsewhere are tightening the screws. However, we still expect that gap to close eventually, for two reasons. First, while the long-running rise in the labour force participation rate stalled over the last couple of years, the share of the population available for paid employment is now on the rise again. What’s more, mobility has recently reached pre-virus levels for the first time since the start of the pandemic, which suggests that households are learning to live with the virus even if currently they are not spending as before. The still very high household savings rate should fall in earnest before long.

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More from Tom Learmouth

Japan Economics Weekly

Coal, cautious consumers, the BoJ starts to relax

Japan’s ban on Russian coal is unlikely to lift domestic energy prices much given that coal import prices closely track the Newcastle spot price which have fallen sharply over the past month. A bigger risk to the strong rebound in consumption we’re expecting over the coming months comes from elderly consumers remaining cautious even after receiving three jabs. Meanwhile, the Bank of Japan has settled back into its usual pattern of modest JGB purchases. We think Yield Curve Control would only become unsustainable if the Bank is forced to conduct unlimited fixed rate auctions on a weekly basis over an extended period of time. We are sending this Weekly one day earlier than usual because our offices are closed for Good Friday on Friday, 15th April

14 April 2022

Japan Data Response

Japan Machinery Orders (Feb. 2022)

The sharp fall in machinery orders in February supports our view that business investment fell further in Q1 after a disappointing 2021. However, survey evidence and strong corporate profits point to firms ramping up capital spending later this year.

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Japan Economics Weekly

Large current account surplus not a thing of the past

Surging import prices and depressed services exports have shrunk down Japan’s current account surplus to near zero over the past year. However, we expect a large surplus to return over the next couple of years as earnings from overseas assets rise and exports rise faster than imports which have been unusually strong relative to domestic demand. That may put some upwards pressure on the yen, but our view is that interest rate differentials rather than the terms of trade have recently been the key determinant of the exchange rate. And with the spread between US and Japanese yields to widen further, the yen may weaken further against the dollar.

8 April 2022
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