— Cabinet Office: Output Weaker But Should Rebound In Early 2011

TOKYO (MNI) – The Japanese government on Thursday repeated its
latest assessment of the economy, saying the recovery is still
“pausing,” hit by slower Asian growth.

In October, the government revised down its view for the first time
in 20 months.

In its monthly economic report for November, the Cabinet Office
noted recent weakness in consumer spending and industrial production but
didn’t downgrade its overall assessment because household income is
recovering and automobile output is expected to rebound early next year.

“Even if the economic recovery pauses for two to three months, it
would not immediately lead to a contraction,” Fumihira Nishizaki,
director of macroeconomic analysis at the Cabinet Office, told
reporters.

The soft spot in consumption is reflected in slower car sales after
consumers rushed to dealerships before the government ended its subsidy
for buying low-emission vehicles in early September (although lower tax
rates still apply to buying and owning energy-efficient cars).

Average household spending was unchanged at Y275,367 in September
from a year earlier, as rush purchases of cigarettes ahead of the Oct. 1
tobacco tax hike and higher spending on durable goods were offset by
declines in domestic holiday tours and medical costs.

The September figure followed a 1.7% rise in August, the third
consecutive year-on-year rise in inflation-adjusted terms.

New vehicle sales in Japan fell 26.7% in October from a year
earlier to 193,258 units, after a 4.1% drop in September, the first y/y
drop in 14 months. This compares with the 46.7% surge in sales in
August.

On the bright side, employee compensation in real terms is
recovering, up 0.6% in September from August, reflecting gradual job
creation and improving wages.

Nominal average monthly total cash earnings per regular employee in
Japan rose 0.9% year-on-year to Y267,975 in September, posting the
seventh straight year-on-year gain. The gain was due to higher overtime
pay, while base wages showed no growth.

Meanwhile, the index of industrial production fell 1.6% in
September from August, the fourth straight monthly decline after -0.5%
in August. In July-September output dropped 1.8% q/q after a 1.5% gain
in April-June, the first q/q drop in six quarters.

Automobiles and electronics, which carry a heavy weighting in the
index, are pulling down overall industrial output while the automobile
market is expected to remain weak for now and demand for semiconductors
is falling in both domestic and overseas markets.

July-September GDP data showed that Japan’s net exports (exports
minus imports) made virtually no contribution to economic growth — only
+0.02 percentage point — as export growth continued to slow to +2.4%
q/q in July-September from +5.6% in April-June.

Lower shipments to Asia led the slowdown in overall exports.

But the government is not too pessimistic about the outlook for
production, which, together with exports, holds the key to a sustained
economic recovery.

“Automakers have told us that after a sharp decline in output in
October-December, they expect their production to return to pre-rush
purchase levels in January-March, suggesting the current slump may be
temporary,” Nishizaki said.

“Our main scenario is that industrial output will rebound early
next year.”

But there remains uncertainty whether households will resume
spending on automobiles after rush purchases earlier this year,
Nishizaki admitted.

In addition, the effects of the reward program for purchases of
greener consumer electronics — airconditioners/heaters, refrigerators
and digital TVs — that has supported retail sales are fading.

The government’s plan to lower points gained from buying those
appliances, effective Dec. 1, may again prompt last-minute purchases,
which might be followed by slower spending.

The government still expects an improvement in growth ahead, helped
by government stimulus measures and gains in overseas markets, though it
admitted that risks to this scenario remain.

“As for short-term prospects, although some weak movements are seen
for a while, the economy is expected to be picking up, reflecting
improvement in overseas economies and the effects of various policy
measures,” the Cabinet Office said in the report.

“On the other hand, there are risks that the economy is depressed
by a possible slowdown in overseas economies and fluctuations in
exchange rates and stock prices,” it said. “It should also be noted that
there is still a risk from the influence of deflation on the economy and
a concern about a possible deterioration of the employment situation.”

China’s economic growth has slowed to +9.6% year on year in
July-September from +10.3% in April-June and +11.9% in January-March
while the pace of recovery in other Asian economies has also
decelerated.

The recent appreciation of the yen has already had some negative
impact on the Japanese economy, said Nishizaki.

He added that the government must watch for further downside risks
the yen’s strength might pose — hampering a recovery in business
investment and prompting firms to move their factories overseas.

Government surveys have shown that the high yen has dampened
business and consumer sentiment, as lower export profits mean overtime
hours worked at factories are being cut and total wages may decline.

tokyo@marketnews.com
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