Global Watch April 2016

Transcription

1 10 May 2016 Economic Report Global Watch April Overview of the Japanese Economy: Remains Roughly Flat By Shinichiro Kobayashi,Senior Economist The economy continues to be basically flat. Recently announced monthly economic indicators present a mixed picture of strengths and weaknesses and do not show a clear sense of direction. An examination of recent trends in the corporate sector shows that in the Bank of Japan s Tankan survey for March, the DI measuring corporate sentiment about economic conditions among large manufacturing corporations declined six points from the previous survey to stand at 6. The same DI among large non-manufacturing corporations decreased 3 points, to 22. Both indicators reflect a deterioration in corporate sentiment. Corporate judgments about future trends also show a weakening of corporate sentiment, and corporations are cautious about the direction the economy may take (Chart 1). The index of industrial production in February showed a sharp drop of 6.2%, mainly in the transportation machinery and electronic components and devices industries. Factors accounting for this were the suspension of production at plants of an automobile manufacturer and the slump in overseas demand for smartphone parts and components. Also, the level of the index in February was the lowest it has been since the last increase in the consumption tax rate and the lowest since just before Prime Minister Shinzo Abe took office in November The survey of production forecasts for March calls for an increase of 3.9% and another gain of 5.3% in April, indicating production will show an improvement, centering around the transportation machinery industry. Therefore, it appears that the risk of industrial production going into a downturn following the weakness in February will be avoided, but, in recent months, there has been a trend toward actual levels of production falling below the forecast levels, and it appears likely that industrial production will remain virtually flat. Real exports increased 1.9% in February for the first rise in three months, but, on average, they also appear to be virtually flat. Exports to the United States, mainly automobiles, are holding firm, but, in Asia, as a result of the deceleration of the economies there and the decline in demand for smartphone parts and components, exports to the rest of Asia have stagnated. On the other hand, orders for machinery and equipment (private sector, excluding shipping and electric power) posted a sharp increase of 15.0% over the previous month in January. This sudden increase is believed likely to be temporary and may have been caused by the placement of orders for certain large projects in January. A 1 / 5

2 reactionary decline in orders is expected in February, but recent GDP and other statistics have confirmed the firmness of the trends in capital investment and there is a possibility that this movement toward improvement will continue going forward against a background of an uptrend in corporate performance. In the household sector, the supply and demand balance for labor remains tight, and the unemployment rate decreased to a low 3.3% in February, while the ratio of job openings to job seekers remained at 1.28 times, as high as during Japan s bubble economy. However, total per capita cash compensation of workers, after having been virtually level with the same period of the previous year for three consecutive months, rose 0.9% in February; however, on average, the rate of increase in cash compensation is only moderate. Amid these conditions, personal consumption on average continues to be weak. According to the February Family Income and Expenditure Survey (covering households of two or more persons, seasonally adjusted), consumption is improving and rose 1.7% over the previous month (1.2% over the same month of the previous year), in part as a result of the diminishing impact of unseasonable weather conditions, but the improvement trend lacks momentum. Prices continue to be stable, and the consumer price index (comprehensive index, excluding fresh food) in February was virtually level with the same month of the previous year. Since the decline in energy prices is expected to continue going forward, and import prices will fall because of the strengthening of the yen, there is a strong possibility that consumer prices may again fall below the same periods of the previous year. Even though conditions are said to have settled down, the risk remains that turmoil in financial markets and the deterioration of consumer and corporate confidence may have a negative impact on the economy. Even so, the declines in crude oil and other resource prices are expected to contribute to boosting household income and corporate profits; accordingly, the outlook is that an economic downturn can be avoided. In addition to support for consumption coming from wage increases, capital investment is expected to remain on a moderate upward trend. As a result, the economy may break out of the current holding pattern and move to a moderate rising trend. In the summer and thereafter, the quieting of turmoil in overseas economies may bring a stronger pace of improvement. However, if the trend toward deceleration in the world economy becomes more pronounced, the economy may remain virtually flat for a prolonged period. ( ) 2 / 5

3 Chart 1: Trends in Corporate Business Sentiment Forecast ( Improving minus deteriorating replies, percentage points) Large manuf acturing corporations Large non-manuf acturing corporations (Quarterly data) Note: The most-recent f igures are the three-month f orward f orecasts as of the March survey. Source: Bank of Japan, Tankan Survey of Short-Term Economic Sentiment 2. Topic of the Month: Corporate Foreign Currency Rate Assumptions and Performance Plans in Manufacturing Industries By Shinichiro Kobayashi, Senior Economist In the Bank of Japan s Tankan survey for March, the compilation of corporate business plans for the next fiscal year (fiscal 2016) was disclosed for the first time. Within the data for ordinary profit, the plans among large manufacturing corporations for fiscal 2016 call for a decline of 1.9% from the estimate of the final figures for fiscal 2015, which represented a drop of 3.5% from the previous year. Among large non-manufacturing corporations, the plans predict a drop of 2.1% from fiscal 2015, which was 11.9% above the estimate of the final figures for fiscal In other words, all the outlooks in the plans were cautious. Especially in the manufacturing sector, the forecasts were particularly pessimistic calling for two consecutive years of decline due to the effects of the slowdown in overseas economies and diminishing of the boosting effect of the decline in the value of the yen. Moreover, the rate assumed for the business forecasts was US$1= , more than 5 higher than the closing rate on the date of announcement, which was US$1= From this, it appears that the plans were adjusted to the prevailing exchange rate and all the forecasts seemed to assume that the estimate of ordinary profit would be adjusted downward. Why were the assumed rates set at a level that diverges from the actual rates? By setting the yen at a cheaper level than the prevailing rates, if corporations can show even a little more profit, the believability of the outlook 3 / 5

4 would be lowered. In actuality, there seems to be a tendency to set the assumed rate as of March close to the level of the estimated actual rate of the previous fiscal year rather than the prevailing rate at the time of the survey (refer to Chart 2). For example, in the March survey, rather than setting the rate at the average for March, which would have been US$1= , the rate was set at US$1= , which is close to the estimated outlook for fiscal 2015, which was US$1= Since forecasting the rate for the next fiscal year is difficult in practice, when preparing forecasts, there are many cases where a figure close to the estimated outlook for the year about to end is taken as the rate for the following year. In addition, since corporations actively made use of forward foreign exchange contracts during the previous year, there is also the possibility that can convert to yen at a rate near the level of the previous year. However, divergence from this trend is a special feature that was first evident in March when plans for the next year are compiled, as surveys proceed, the assumed rate approaches the actual rate. For this reason, business plans as of March are likely to be unaffected by exchange rate fluctuations and close to plans because they are prepared from a neutral perspective. In this sense, business plans as of March may be said to be extremely valuable data showing the true capabilities of corporations. ( ) Chart 2: Estimated Yen/U.S. Dollar Rates (As of the date of the March survey) ( /US$ exchange rate) (Fiscal years) March survey Average for March Outlook for the actual rate for the previous fiscal year Note: The average rate for March is the average closing rate on the Tokyo market. Source: Bank of Japan, Tankan Survey of Corporations Nationwide 4 / 5

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