Possible Japan Economy Rebound:

 Article Source: https://mainichi.jp/english/articles/20220520/p2g/00m/0bu/069000c

Article:

TOKYO (Kyodo) -- Japan's economy is likely to be on a growth track from the current quarter, but analysts say surging commodity prices due to Russia's war in Ukraine will weigh on private consumption and become a headwind to its recovery from the coronavirus pandemic fallout.

After all COVID-19 curb measures to contain the surge of infections caused by the Omicron variant were lifted in late March, many analysts expect a strong increase in gross domestic product in the April to June quarter led by the services sector, following an annualized real 1.0 percent decline in the January to March period.

Ideas:

Private consumption or consumer spending has always been a challenge in Japan. Its only about half of Japan's GDP while in other advanced economies its around 60 percent of GDP.

Then add in increased inflation and also the lack of wage increases its looks like consumer spending is not going to help much at the time being.

Yes, the end or somewhat of an end in the pandemic situation might help some but its not going to be enough to push the economy forward.

Inflation along with the weak Japanese yen might be enough to stall the economy at the present time.

Article:

Annualized real GDP in the first quarter came to 537.92 trillion yen ($4.2 trillion), still lower than the October to December quarter of 2019, the last pre-pandemic quarter when it was 541.81 trillion yen, according to preliminary data released by the Cabinet Office on Wednesday.

The GDP growth forecasts by 36 economists averaged an annualized 5.18 percent expansion for the second quarter of 2022, and they forecast that growth will gradually lose momentum in the following quarters to 3.11 percent, 2.04 percent and 1.71 percent.

For the whole of fiscal 2022 from April, growth of 2.37 percent is expected, according to a poll by the Japan Center for Economic Research.

Ideas:

If the Japanese economy does see an annualized growth of 5.18 is very good or even its only 3.11 percent its still very good. But it was be remembered just how bad the Japanese economy has been in 2020 and most of 2021. So those percents are really not that much yet.

If you had a very good 2020 and 2021 and then you see those numbers then we could say the economy really grew, but what the numbers are just saying that the economy is improved or somewhat improved from a not so good two years.

At the same time, numbers don't tell the whole story. The real story are small businesses and houesholds and what are they thinking or feeling right now with inflation increasing and no wage increases. 

Do they really care about 5.18 or 3.11? They care about their lives and their small busineses in the face of increased inflation.

Article:

But many analysts including Yoshiki Shinke, senior executive economist at the Dai-ichi Life Research Institute, warn of being too optimistic about the outlook as the impact of the war that started on Feb. 24 will start to manifest in coming quarterly data.

"Price hikes in daily necessities including food will dampen consumer sentiment and weigh on private spending," Shinke said. "Once an expected rebound in the April-June quarter runs its course, the impact of rising prices will be easier to feel."

Japan's core consumer price index already gained 0.8 percent in March from a year earlier, the fastest pace in over two years, due to surging fuel and raw material costs.

Ideas:

Yes, once the euphoria of the pandemic controls being lifted has run its course and there is a small increase in spending, reality will set in with increases in energy prices, supermarket prices, restuarant prices, household energy prices, and gasoline prices begin to dominate, consumer spending will probably see a decrease as consumers and businesses begin to cut back as much as possible.

Along the way busineses, which have usually been reluctant to increase prices will begin to see they have no choice if they want to survive or want to maintain their current profit margins and they will begin to pass on their costs to the next in the supply chain, which means eventually the final consumer.

Unless the government comes up with some kind of subsidy for households and or for businesses as a stimulus or can find ways to reduce energy and inflation costs, there might not be a significant surge in consumer spending this summer.

Article:

For April, analysts expect the core CPI to further accelerate toward 2 percent, a long-elusive goal set by the Bank of Japan.

To help ease the pain of high prices, the Japanese government has crafted a 6.2 trillion yen emergency economic package, which includes subsidies to oil wholesalers to bring down retail gasoline prices.

But even with the relief measure for fuel prices, average Japanese households may face an extra expense of 60,000 yen ($465) in 2022, if the Japanese yen remains at a 20-year-low level against the U.S. dollar and fuel prices stay elevated, according to an estimate by Mizuho Research & Technologies Ltd.

Ideas:

The Bank of Japan's targeted goal of 2 percent inflation no where near in sight as it has always been related to consumer demand and consumer spending and not supply inflation which is what the CPI is all about now, as suppliers increase their price as their raw material costs keep increasing.

Consumer demand has not risen to 2 percent level yet, where supplier and other raise their prices based on increase consumer spending and or increase consumer demand. That is not happening that this time.

The subsidies for oil wholesalers is very good but it needs to be relative, meaning as energy prices continue to increase the subsidy should be increased to make sure oil wholesalers are not forced to pass on their increased costs to the next in the supply chain.

So as households continue to see increases in energy prices and other things they will begin to crowd out spending in many areas and as such consumer spending might be even less in the coming quarters.

Article:

For resource-poor Japan, recent rapid depreciation of the yen has partly contributed to price inflation. Saisuke Sakai, senior economist at Mizuho, said about a quarter of the estimated additional cost is attributable to the weaker yen.

"There are no major factors that will change the dollar-yen rate situation for the time being," Sakai said. "Increasing import costs will add burdens for companies and households."

The calculation was based on the dollar being traded at an annual average of 130 yen and the West Texas Intermediate crude oil price moving at around $108 per barrel.

Ideas:

Japanese consumers seem to be very price sensitive so any kind of price increase. So even though the weak yen is attributed to about a quarter of the inflation increase it might be too much for some, especially those who are on limited or fixed incomes or who have a lot of debt.

Unfortunately, it is what it is meaning Japan being a resource-poor economy is something is always going to be there and the weak yen of course just makes it worse.

If it was just inflation then maybe it wouldn't be quite as bad but add in the weak yen makes inflation even worse or makes the already high prices even higher for some or many.

Crude oil at $108 per barrel is very high and it migh not trend down anytime soon or in the near future.

Article:

The yen has weakened as the BOJ has kept interest rates at near zero as part of its accommodative monetary policy, while the U.S. Federal Reserve is expected to keep raising rates to tame inflation.

Recovery in consumption may also be slowed if Prime Minister Fumio Kishida's government takes anti-virus measures amid a future surge in COVID-19 cases, said Taro Saito, executive research fellow at the NLI Research Institute.

"Private consumption will not recover sustainably" if economic activities are repeatedly restricted, Saito said.

Ideas:

Kuroda and the Bank of Japan has its own ideas on how to manage the economy as does the US Federal Reserve. Which strategy is correct is probably not the best question but what is going to work for different situations or different economies is maybe the better question as we will see how each strategy evolves in the coming months.

And even then there is no real economic experiment other than the natural experiement of just watching and seeing what happens in each economy. You can run all the computer program experiments, with all the numbers you want. but in reality it comes down to how consumers and businesses respond to different situation in their daily lives.

Consumer spending always seems to be the key in any economy. And related who responds to how consumers spending or activity is less or more as to what will happen to an economy.

For example, if consumer spending sees a significant increase related businesses might begin to spend more, invest more, and maybe even increase wages of their employess. But if the opposite is true, then businesses might do the opposite.

Article:

While other major economies have moved on to a "living with the coronavirus" phase, Japan has not. That has left the Japanese economy lagging behind those of the United States and European countries, the economist said.

Fallout from Japan's economic sanctions on Russia over the war in Ukraine is also something to be watched closely, Saito said, particularly whether Japan can secure energy supply, as Kishida has said Japan will "in principle" ban Russian oil imports.

"Since energy supplies would be lower, though to what extent is yet unclear, the economy may be disrupted," he said.

Ideas:

Its kind of a mystery as to why Japan also has not moved on and moved into a "living with the virus" phase. 

Maybe it has to do with the upcoming elections. Maybe it has to do with the state of the medical system in Japan. Maybe it has to do with large number of elderly people in the country. Maybe it has to do with China and its continued virus situation. Or maybe its a combination of things or something that is not being said.

Whatever it is, the Japanease economy is missing a golden opportunity, with the weak yen, to get its economy back on track to the pre-pandemic level. 

Over 31 million international tourists went to Japan in 2019, before the pandemic, which resulted in a lot of money flowing into the economy. if there is ever a time to counteract the negative effects of inflation and move out of the pademic era this summer would have been the perfect time.

Article:

That could be a repeat of the power crunch Japan experienced in March, when some thermal power plants went offline due to an earthquake that hit Japan's northeast. Some manufacturers halted operations at factories to help save electricity.

In 2021, Russian oil accounted for 3.7 percent of Japan's total crude oil imports, while 8.7 percent of the total liquefied natural gas imports were from the resource-rich country, according to government data.

Ideas:

Whenever there are potential supply shortages there are going to be increases in prices. So the Russia situation is not going to help in lowering energy prices in Japan.

As the summer heat continues to reach record highs energy needs or going to increase which of course there are going to be even more energy challenged situations.

But Japan is not the only country is this situation as record summer heat temperatures are going to challenge many countries and then add in the already high energy prices and the Ukraine situation, energy prices, at least for the summer are not going to see any trending down anytime soon.'

Article:

On the likelihood of Japan tightening its sanctions by phasing out or banning LNG imports from Russia, Deputy Chief Cabinet Secretary Seiji Kihara has said the government will "think about how to deal with it when it becomes necessary."

"There are plenty of concerns," said Shinke. "There is a fair chance of the GDP growth for fiscal 2022 falling below 2 percent."

Ideas:

If possible, countries should always have a large number of suppliers to rely on instead of just one or two suppliers as we see today anything can happen.

The same can be said for those companies that rely on one or two semiconductor chip supplers only when the chip shortage might cause to shut down production for a lack of chips.

The same for energy needs of countries Have a number of suppliers avaiable for whatever happens in the future.

GDP economice growth for fiscal 2022 doesn't look as promising as expected at this time. But the situation could be much different in Q3 or Q4 as things can change quickly sometimes.

Have a nice day and be safe!