Eco Pulse

Japan: labour shortages are weighing on activity

10/20/2023
PDF
Japan: economic indicators monthly changes

Japanese economic surveys are sending out mixed signals. On the positive side, the business condition index from the Tankan survey improved from 8 in Q2 to 10 in Q3, driven by services: business confidence in the sector was the highest since 1991. The PMI for services is also proving resilient. Although down 0.5 points in September, it remains in expansionary territory at 53.8. Conversely, the manufacturing PMI fell further into the contraction zone for the fourth consecutive month (-1 point to 48.5). As a result, the composite PMI dipped to 52.1 in September. The Economy Watchers Survey dropped from 3.7 points to 49.9 points in September.

Japanese inflation fell slightly to 3.2% y/y in August (compared to 3.3% in the previous month). Food products remain the main contributor to price rises (+8.8% y/y for a contribution of 2.3 pp to headline inflation). Conversely, energy deflation is intensifying (-9.8% y/y), subtracting, as a result, nearly 1 pp from headline inflation. Core inflation, excluding fresh food and energy, continues to rise, up from 4.6% y/y to 4.7% y/y. However, pressure on production prices is easing. The PPI index slowed by 1.3 pp to 2% y/y in September, suggesting a stabilisation or even a drop in consumer price inflation in the coming months. This signal is in line with the fall in inflation in the Tokyo region to under 3% in September. However, the yen’s historic depreciation continues, and the exchange rate with the US dollar is now close to USD/JPY 150, which is likely to fuel more imported inflation.

The historic labour shortage represents a further challenge. The employment diffusion index from the Tankan survey dropped to -33 in Q3 and could reach -37 in Q4 according to the latest forecasts. If this were to happen, this would be the lowest level seen since 1991. At 2.7% in September, the unemployment rate remained stable and 0.5 pp above the 2.2% low posted in December 2019. Despite the tight labour market, nominal wages are still not rising, and real wages remain in negative territory, at -2.5% y/y in August. This is impacting household confidence, as well as household consumption, which fell year-on-year in August for the 6th consecutive month (-3.4% y/y), according to the monthly survey by the Ministry of Labour.

Against this backdrop, we anticipate a slowdown in activity in Q3 (growth of 0.1% q/q after reaching 1.0% on average per quarter in H1), before a slight recovery in Q4 (0.3% q/q). However, favourable carry-over effect in 2022 should keep growth at a relatively high level of 2.0% y/y for 2023 as a whole.

GDP growth

Guillaume Derrien in collaboration with Nassim Khelifi

Article completed on 16 October 2023

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
OECD countries: EcoPulse of 20 October 2023

OECD countries: EcoPulse of 20 October 2023

Economic surveys in September are sending out mixed signals. Consumer confidence is falling in most countries, which in some cases (France, Spain) underlines a slight rise in inflation [...]

Read the article
Eurozone
Eurozone: from weak growth to no growth?

Eurozone: from weak growth to no growth?

The inflation situation, in the Eurozone, is cooling. Added to this good news is the surprising continued drop in the unemployment rate (6.4% in August compared with 6.7% at the beginning of the year) [...]

Read the article
Germany
Germany: and now, disinflation

Germany: and now, disinflation

German inflation resumed its downward trend, after stabilising between May and August (6.4% y/y in August according to the harmonised index), to reach 4.3% in September, due, firstly, to base effects (seasonally adjusted inflation was 2 [...]

Read the article
France
France: smoothing the impact of a shock also means delaying some of its effects

France: smoothing the impact of a shock also means delaying some of its effects

The hierarchy has changed: French inflation, which was well below inflation in the eurozone, is now higher (5.7% in September compared to 4.3% y/y, according to the harmonised index) [...]

Read the article
Italy
Italy: employment continues to rise

Italy: employment continues to rise

Household confidence has dropped slightly since April. This reflects a decline in purchasing intentions for durable goods and a deterioration in the outlook for unemployment. Nevertheless, the Italian labour market remains on track [...]

Read the article
Spain
Spain: the inflationary risk is emerging again

Spain: the inflationary risk is emerging again

In September, the European Commission’s economic sentiment indicator fell to its lowest level of the year in Spain. This reflects a slowdown in activity which, according to our forecasts, will result in a slowdown in growth to 0.3% q/q in Q3 and 0 [...]

Read the article
United States
United States: Household sentiment is eroding

United States: Household sentiment is eroding

Business climate has marginally weakened in September in the United States due to diverging developments in the Manufacturing and Non-Manufacturing sectors. The latter has slowed to 53.6 (-0 [...]

Read the article
United Kingdom
UK:  the labour market is deteriorating

UK: the labour market is deteriorating

The UK labour market has reached a tipping point. For the Bank of England (BoE), in addition to the slowdown in the housing market, this is a further indication of the wider transmission of the rise in interest rates to the real economy [...]

Read the article