Japanese govt upgrades assessment of economy for first time in 2 months

Shoppers buy fruits at a department store in Tokyo yesterday. The Japanese government upgraded its assessment of the economy yesterday, as emerging signs of an upturn in exports and factory output added to growing evidence that Prime Minister Abe’s aggressive polices are beginning to reignite growth.

Reuters/Tokyo

Japan’s government upgraded its assessment of the economy in May for the first time in two months, in a sign growth is accelerating as exports and factory output pick up.

The economy is gradually recovering, according to the government’s monthly economic report released yesterday. That was an upgrade from last month, when the government said the economy was showing signs of recovery but still had some weak spots.

Japan’s gross domestic product expanded in January-March at its quickest pace in a year, data showed last week, as gains in consumer spending and a rebound in exports helped the economy recover from a slump last year.

The upgrade highlights the success of Prime Minister Shinzo Abe’s policies, which combine stimulus spending with aggressive monetary easing to pump-prime the economy and are resulting in a sharp weakening of the yen.

“We expect the economy to continue to recover as exports improve and as economic stimulus and monetary policy steps bolster sentiment,” the Cabinet Office said in the report.

Abe, who is preparing to lead his Liberal Democratic Party in an upper house election in July, has put in place aggressive monetary easing and heavy fiscal spending with the aim of beating 15 years of nagging deflation.

The policy mix, dubbed “Abenomics”, has pushed the yen to a 4 1/2-year low and sparked about a 75% rally in Japanese shares since November.

The government said exports are showing signs of recovery, which was in an upgrade from last month as the weak yen pushes up export volumes of cars, steel and chemicals, according to the Cabinet Office. That marked the second consecutive month of upgrades.

The report said factory output is gradually recovering, which was the first upgrade in two months. In April, the Cabinet Office said output was only showing signs of recovery.

Private consumption is recovering and capital expenditure is bottoming out, the Cabinet Office said, which was unchanged from last month’s report.

The Bank of Japan stunned global financial markets last month by agreeing to double the amount of government debt it holds over the next two years to end deflation and achieve its 2% inflation target.

The overhaul of monetary policy has helped shares rally and pushed down the yen, but it caused yields to rise temporarily, leading the BoJ to boost money market operations to reduce volatility and push yields lower.

Meanwhile, Japanese manufacturers’ sentiment rose for a sixth straight month in May, turning positive for the first time in a year and reinforcing recent evidence that Prime Minister Abe’s expansionary policy has generated more confidence in the economy, a Reuters poll showed.

The poll showed that increasing optimism among manufacturers was largely driven by exporting sectors, including electric and precision machinery, that have benefited from a weakening in the yen after the Bank of Japan aggressively eased monetary policy last month.

The mood in the service sector also picked up and was seen rising further as consumers drew confidence, in part, from a surge in share prices.

The BoJ, which is expected to leave policy unchanged at a two-day meeting ending tomorrow, is likely to take the Reuters Tankan results as a sign that its overhaul of monetary policy is working to improve corporate sentiment.

“Manufacturers had been lagging the services sector, but a weak yen and improvements in the US economy mean that manufacturers’ sentiment is starting to catch up,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“This is in line with the bullish scenario that the BoJ has laid out. There’s no need to change policy.”

The manufacturers’ sentiment index rose by 11 points to plus 7 in the Reuters Tankan for May, logging the first positive figure since May 2012 and its highest reading since September 2011. It is expected to reach plus 22 in August.

The monthly poll closely correlates with the central bank’s key Tankan quarterly company survey.

The poll comes days after government data showed the world’s third-biggest economy grew a faster-than-expected 0.9% in January-March from the previous quarter thanks to a big gain in private consumption and a pick-up in exports.

 “A weak yen could have a big impact on our earnings, but its effects have not yet played out much in real demand,” one electric machinery maker said in the Reuters survey.

Since Abe unveiled his strategy in November to end two decades of economic stagnation, prior to his election the following month, the yen has fallen sharply and share prices have rocketed by 70%.

Abe is hoping that the wealth-creating effects of a buoyant stock market and expectations for further improvement in the broad economy will generate a virtuous circle of consumption, investment and employment that will ultimately revitalise growth.

The yen’s decline accelerated after the BoJ stunned global financial markets in April by committing to open-ended asset buying to nearly double the monetary base to ¥270tn ($2.62tn) by the end of 2014 in a shock therapy to achieve 2% inflation.

Supporting the view that the benefits to the economy have been largely psychological so far, some companies complained of a lack of real demand, suggesting that a fully fledged recovery may not take hold for some time.

A precision machinery maker said: “Economic recovery is felt due to a weak yen caused by Abenomics monetary policy. But it has not led orders to recover and the situation remains tough.”

Other manufacturers complained that higher import prices were squeezing profits as they struggle to pass on higher costs to their customers.

The Reuters Tankan showed the index for service sector firms rose seven points to plus 19 in May, marking its highest reading since October 2007. It is seen reaching plus 28 in August led by sectors including real estate/construction and retailers.

The survey of 400 midsize and big firms, taken between April 26 and May 15, drew responses from 259 companies. Index readings are derived by subtracting the percentage of pessimistic responses from optimistic ones.