Japan’s Economy: Monthly Outlook (October 2019)

◆The US-China trade negotiations having taken a step forward was good news for both the global and Japanese economies. However, considering the fact that both sides made claims at variance with the facts, and that there are no signs that China might accept the full-fledged structural reform demanded by the US, it would be difficult pin one’s hopes on future developments in the negotiations. Completely aside from the US-China problem, the global economy is in a cyclical downturn. Of course, the situation does not lack its bright side. In many countries, there are signs in the economically sensitive industries, which entered the adjustment phase early on, that they are about to bottom out. Meanwhile, in countries which still have some leeway for the implementation of fiscal and monetary policy, steady growth is continuing. These are factors providing support for Japanese exports.

◆Cause for concern regarding the Japanese economy is, rather, the effect of sluggish overseas demand spilling over into domestic employment and income, with little room to move in terms of policy. Notably, in the area of monetary policy, the Bank of Japan has no more policy tools left to lead the economy upward in a big way all alone. Now, to this situation is added the effects of the consumption tax hike. This year’s tax increase, along with the net fiscal tightening effect of enhancing social security, come to approximately two-trillion yen. Although it is a minor amount in comparison to the eight-trillion yen experienced the last time the consumption tax was increased, it is still at a scale which can’t be ignored.

◆In addition, there is the issue of last minute demand and reactionary decline which are factors expected to cause economic fluctuation in the short-term. In this report, we make use of currently available macro-economic statistics as well as industry statistics to examine two important facts associated with last minute demand occurring up through the month of September, just before the consumption tax hike went into effect. The first of these is the fact that in comparison to the last two times the consumption tax was increased, the scale of last-minute demand was kept under control to a certain degree. One of the reasons behind this was government measures implemented to keep demand at an even keel, such as reduction of the automobile tax and reward points for using cashless payment. However, the other fact that was discovered is that last minute demand did indeed take place. Demand grew just before the tax hike went into effect in a variety of areas, including automobiles – especially regular vehicles and light vehicles – while in the area of housing, demand grew for owned dwellings and those built for sale. Meanwhile, in the area of retailing, demand grew especially for department stores. Last-minute demand occurred most prominently in those areas that fell through the cracks in the government’s countermeasures.

◆Now we must be vigilant regarding the future, with the expectation not only of a reactionary decline in response to last-minute demand, but reaction to last-minute shipments as well, which appeared before last-minute demand. Last-minute shipments were especially prominent in industries including household electronics, pulp, paper & paper products, and chemicals. Though this phenomenon may have contributed to growth initially, that effect will disappear in the future and likely shift into a reactionary decline.