BOJ’s June Tankan Survey: Weakness in Private Consumption Concerning

Although a gradual recovery trend in the Japanese economy has been confirmed, weakness in consumer spending is concerning.

It is hoped that the government and the Bank of Japan will thoroughly examine trends in the economy and high prices and make use of the results in their policies.

The central bank has released its Tankan quarterly economic survey for June. The diffusion index indicates corporate business confidence. The index for large manufacturing companies, a leading indicator, was 13, up 2 points from the previous quarter. It was the first improvement in two quarters.

In the March survey, the index had deteriorated for the first time in a year, affected by Daihatsu Motor Co.’s fraud problem regarding quality. This time, Daihatsu has resumed production, and the costs of raw materials such as petroleum and coal products have been passed along through sales prices in basic materials-related industries, leading to an upturn in business confidence.

The Japanese economy is at a critical point regarding whether it can completely overcome deflation as the benefits of strong business performance and high wage increases at large corporations spread to small and midsize enterprises. It is good news that the recovery trend could be reconfirmed among large manufacturing companies, which have many business partners.

However, a cause for concern is that business confidence at consumption-related companies has deteriorated.

The index for large nonmanufacturing companies, which mainly rely on domestic demand, deteriorated for the first time in the four years since June 2020, falling 1 point to 33. The indexes for businesses related to private consumption fell across the board, as they are greatly influenced by the index for the retail industry, which declined by 12 points to 19 from the previous quarter.

As wage increases have not kept pace with the prolonged rise in prices, real wages saw negative growth for more than two years until April. Consumers are becoming thriftier, casting a shadow over business confidence in the service industry. The government and the BOJ need to be more vigilant to prevent private consumption from stalling.

As a measure to deal with high prices, fixed-amount tax cuts have been implemented for income and resident taxes since June. From August, a measure to reduce electricity and gas bills will be reinstated for a three-month period. According to some analyses, however, these support measures will result in money flowing into savings with little effect on stimulating consumption.

If measures are to be taken, it is essential to focus on necessary support, rather than pork-barrel spending with little impact.

It is also notable that a major factor contributing to high prices is the depreciation of the yen, with the dollar recently worth more than ¥160. This is because the large difference in policy rates between Japan and the United States makes it more advantageous for investors to invest in U.S. dollars.

Many in the financial markets expect the BOJ to additionally raise interest rates by this autumn in response to the economic recovery. While raising interest rates is expected to put the brakes on the yen’s depreciation to a certain extent, it will be a burden on the cash flows of small and midsize enterprises and others.

The BOJ will hold its monetary policy meeting late this month. It is important to deepen the analysis of prices and the economy to determine the appropriate timing of an interest rate increase, among other policies.

(From The Yomiuri Shimbun, July 5, 2024)