Japenese Economy Moving Out Of Deflation

The economy is clearly getting out of deflation. Consumer prices excluding food and energy were 0.5% higher in November from a year earlier. Although wages are not yet following, consumption growth has been strong, as households have been advancing their purchases ahead of the VAT hike in April. However, industry is anticipating a sharp contraction in Q2 2014.

As expected, industrial production strengthened further in November by 0.1% after a 1% rise in October. In the three months to November, production increased by a very robust 2.6% from the previous three-month period.

Production is driven by three factors. First, increased public work projects have boosted the demand for construction-related manufactured production. For example, production in the iron and steel industry rose by 2.8%. It was almost 10% higher from a year earlier.

Second, household purchases for big ticket items have been advanced ahead of the 3-point VAT hike on 1 April 2014. This has stimulated production in the transport good industry. In November, it rose by 0.7%. Production was 8.4% higher from a year earlier.

Finally, export demand has been stimulated by the recent pickup of the global industrial cycle and the depreciation of the yen. The effect of the latter is limited as many exporters have used the weakening of the yen to improve profit margins. In November, the volume of exports increased by 0.1%.

Manufacturers remain upbeat about the short-term prospects. According to METI’s Survey of Production Forecast, output could grow by 2.8% in December and 4.6% in January. This looks a bit too optimistic, but the direction is certainly right as the same factors that stimulated activity in November will also remain in force in the coming months. Nevertheless, even though many firms are operating close to full capacity, entrepreneurs are reluctant to step up investment, as they fear a steep backlash in April, following the VAT hike.

The strengthening of activity has led to a further tightening of the labour market in November. The unemployment rate remained stuck at 4%, but the job-to-applicant ratio, a better measure for labour market tensions has been trending upward since September 2009. Shortages have been reported in the construction sector.

BY Raymond VAN DER PUTTEN

To Read the Entire Report Please Click on the pdf File Below.