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Wage-boosting tax breaks, Toyota setback

The government’s new plan to offer firms more generous tax deductions for raising wages is unlikely to lift wage growth to 3% as targeted by PM Kishida. But with smaller firms being offered corporate tax credits as high as 40%, we think the new measures may entice some firms into bigger wage hikes against a backdrop of tougher hiring conditions over the next few years. Meanwhile, renewed supply chain disruption in Vietnam – where daily cases are back at record highs – is a downside risk to our upbeat outlook for Japanese car production.
Tom Learmouth Japan Economist
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Japan Economics Update

The implications of an escalating Taiwan crisis

The extent to which neighbouring countries would be affected by an escalation of tensions between China and Taiwan would depend both on which sides they take and on the nature of restrictions imposed by the West and China. ASEAN countries are most reliant on China both as a source of imported inputs as well as a destination for exports, while major disruptions to semiconductor production in Taiwan would severely restrain Japan’s manufacturing industry despite its smaller trade links with China.

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.

8 August 2022

Japan Economics Weekly

The rise and fall of Japan's energy imports

Japan is still struggling to wean itself off fossil fuels despite a new government push to boost solar power. However, the country has become more energy efficient over the past decade, which has helped the economy weather the impact of rising global energy prices. Meanwhile, the government has recommended a 3.3% rise in the minimum wage, the largest move on record. While overall wage growth would get a boost over the next year, we think it would still remain well below the 3.0% level the BoJ maintains is needed to sustain inflation above its 2.0% target  

5 August 2022

More from Tom Learmouth

Bank of Japan Watch

BoJ to extend Covid aid, won’t lose control of yields

While renewed virus restrictions are unlikely to be deflationary, we think Omicron fears will prompt the Bank of Japan to err on the side of caution and extend its emergency corporate funding measures to the end of September. Meanwhile, we disagree with the argument that 10-year JGB yields may spike past +0.25% if inflation surprises to the upside.

9 December 2021

Japan Data Response

Japan Wages & Household Spending (Oct. 2021)

Wage growth stayed weak in October but it should accelerate as the labour market tightens and the recent vaccine-led reopening allows a full recovery in overtime and bonus payments. Meanwhile, the rise in household spending in October supports our view that consumer spending will rebound strongly across Q4.

7 December 2021

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
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