After sustained growth in H1 2023, driven by external demand, the Japanese economy is beginning to slow down. Private demand (household consumption, corporate investment) is offering little support for growth. Although inflation has stabilised at around 3%, it is eroding household purchasing power, which is still not benefitting from significant wage increases. Nevertheless, according to the Ministry of Finance data, corporate profits hit a new record in Q2. Fostering a better redistribution of profits to wages remains a priority for Fumio Kishida’s government, which is preparing a new wave of budgetary measures in October. The Bank of Japan, which also monitors wage developments, is not expected to make any major adjustments to its monetary policy before the results of the annual wage negotiations (Shunto) next spring. However, adjustments to the yield curve control policy cannot be ruled out until then.
Growth and inflationIn the first semester 2023, the Japanese economy was still able to benefit from favourable catch-up effects linked to the belated lifting (in May 2023) of the last border restrictions introduced during the health crisis. This has led to a significant rebound in service exports, which are also driven by the inflow of tourists to the country. As a result, Japanese GDP climbed in Q2 2023 above the pre-Covid peak. However, this positive trend conceals a persistent weakness in private demand. Household consumption and corporate investment are still recording a significant deficit compared to 2019, in the order of 3% for both; this gap even increased in Q2. In fact, real GDP growth for Q2 was revised downwards, from 1.5% q/q initially to 1.2% q/q, mainly due to a greater contraction of these two components, which partially offset the increase in net exports.[1] We are now expecting a sharp slowdown in growth in Japan in the coming quarters, starting with Q3 (+0.1% q/q) and Q4 (+0.3% q/q). On average, growth should reach 2.0% in 2023 thanks to the favourable carry-over effects in H1.
Labour shortages in the Japanese labour market and difficulties for companies to recruit (visible in the Tankan survey) are not enough to fuel sufficient wage growth to support consumption. Nominal wages increased by 1.1% y/y in July after increases of more than 2% in May and June (Ministry of Employment), which is below the rate of inflation; therefore, real wages have not seen positive year-on-year growth since the beginning of 2022. The repeated call from Bank of Japan Governor Kazuo Ueda for companies to grant larger wage increases is a priority for Fumio Kishida. The Japanese Prime Minister, who proceeded with a minor cabinet reshuffle in mid-September, will be unveiling a new budget package in October.
This debate on wages is not without justification. Japanese companies are doing well overall. According to the Ministry of Finance (MoF)[2] quarterly survey, profits rose sharply again in Q2 (+9.5% q/q), to an all-time high, both in terms of level (JPY 26.9 trillion) and as a share of GDP (18.2%). The business model of Japanese companies - based on the dynamics of subsidiaries located abroad - continues to demonstrate its strengths.[3] The significant depreciation of the yen in 2023 has increased profits repatriated from abroad, but companies are also taking advantage of their broad international deployment to optimise their production process and get closer to the various domestic markets. The business climate in the Tankan survey for Q3 corroborates this finding, with a Diffusion Index of 10 compared to 8 in Q2. This positive development is particularly marked for large companies (+4 points to 17), while the index is up more modestly for medium-sized companies (+1 point to 12) and has settled at 5 for small companies.
The challenge for Japan therefore lies in promoting domestic inflation, through the wage-price spiral, while limiting the risk of imported inflation. For the time being, this dynamic remains stalled, although recruitment problems are intensifying, as demonstrated by the Tankan Employment index, which shows a balance of opinions at -33 in Q3, compared to -32 in the previous quarter. In addition, the forecast for the next quarter (-37), should it materalise, would be the worst since 1991. The start of normalisation of monetary policy in Japan is therefore not expected, according to our predictions, before the next collective wage negotiations (Shunto) in spring 2024, a deadline which should coincide with the publication of the major monetary policy review, announced by Governor Ueda last July.
Article completed on 29 September 2023
