Japan’s Economy: Monthly Outlook (July 2019)

◆Implications of US-China negotiations resuming, and deeper significance of G20: US-China trade negotiations resumed after the US-China summit meeting, and the US delayed implementation of its fourth round of tariff increases. The effects of the new round of tariffs on the economies of the China, US , and Japan were estimated as follows: China -0.11%pt, US -0.26%pt, and Japan -0.09%pt, so having avoided this step was good news. However, as it turns out, all this meant was that the two parties were back to square one. As for the structural reforms demanded by the US, the possibility remains that negotiations could break down if China is unable to provide an acceptable response.

◆The temporary truce between the US and China will be a crucial moment for Japan. There is a very good possibility that US-Japan negotiations on automobile tariffs, which are scheduled for a decision on November 13, will go into full swing. If, hypothetically, a tariff of 25% is imposed on all automobiles and automobile parts, an additional increase of taxes totaling 1.2 tril yen could be generated annually. The outcome of US-Japan negotiations will be a life and death situation for Japan, and an important key to predicting the future of Japan’s economy.

◆Overtime regulations with penalties go into effect – are corporations prepared?: The new limitations on overtime work went into effect since April 2019. However, preparations for the change on the part of Japanese corporations are insufficient. The problem of extremely long overtime hours worked by over three million employees in Japan must be resolved over the next 1-2 years. The impact will effect approximately 1.13 billion hours annually, or approximately 0.9% of total labor input.

◆Preparations for the change in labor law on the part of Japanese corporations may be insufficient, but since 2015 when the momentum for correcting long working hours increased, Japanese corporations have managed to resolve the problem of excessively long hours worked by 510,000 employees, though total labor input increased during those three years. The major approach taken was to increase the number of part-time workers and to make use of the concept of work-sharing. Workers used for this purpose were mostly students, the elderly, and women. However, there are limits to this approach. In order to continue this method in the future, it will be necessary to take in re-employed seniors, the non-working population (members of the “employment ice age generation”), and foreign workers.

◆Checking on status quo of last minute demand prior to consumption tax hike: Last minute demand prior to consumption tax hike cannot yet be detected at this time as far as the purchasing of various goods is concerned. On the other hand, last minute demand for housing has been detected. Considering the effect of demand leveling measures and the fact that last minute demand has already occurred before the consumption tax hike in 2014, activity is limited in comparison to the last two times the consumption tax was increased. Of course, the more essential problem is what happens after the consumption tax hike, mainly the negative income effect. Consumption is expected to be restrained throughout FY2020 in association with the coming consumption tax increase.