Japan’s central bank wrapped up its first board meeting of the year on Tuesday with a decision to keep its ultra-loose monetary policy unchanged, though it upgraded its growth forecasts for the world’s third-largest economy.
The Bank of Japan cited easy lending conditions, rising exports and stronger government and corporate spending, in part linked to the 2020 Tokyo Olympics, as reasons to expect a more robust recovery, despite recent weakness in consumption and investment.
It forecast the economy will grow at a 1.4 percent annual pace in the current fiscal year, which ends March 31, up from an earlier estimate of 1.0 percent. It expects 1.5 percent growth in the coming fiscal year, up from the earlier 1.3 percent forecast.
The government reported Tuesday that industrial output rose in December, helped by strength in manufacturing of passenger cars and auto parts, though the 0.5 percent month-on-month increase was slower November’s 1.5 percent expansion.
Part of that improvement is due to a weakening in the Japanese yen against the dollar since the Nov. 8 U. S. presidential election, which has raised uncertainty over the future direction of U. S. policies.
The BOJ cited that as one of several risks beyond Japan’s control. Others include Britain’s plan to leave the European Union, China’s economy and other « geopolitical risks. »
Under BOJ Gov. Haruhiko Kuroda, the central bank is pumping tens of billions of dollars a year into the economy through purchases of government bonds and other assets. It also has made the benchmark interest rate minus 0.1 percent, to discourage banks from keeping money idle. The aim is to counter deflation and keep credit cheap, encouraging banks to lend and businesses to borrow more.
That formula, dubbed « Abenomics » for Prime Minister Shinzo Abe, has yielded mixed results. Growth has remained below expectations and inflation stuck near zero, stymieing efforts to « reflate » the economy and compel consumers and businesses to step up purchases to avoid future price hikes.
Data for December showed an uptick in manufacturing output, which rose 0.5 percent from the month before but was a slower increase than the 1.5 percent month-on-month increase in November.
Household spending fell 1.5 percent from the year before in December, and 2.1 percent from the previous month, despite a 2.3 percent increase in average real income, which partly resulted from bonuses traditionally paid twice a year in Japan.
« The continued weakness of household spending and consumption in general is puzzling, » Masamichi Adachi of JPMorgan in Tokyo said in a research note. « However, we might have understated drags to consumption; concerns of senior people who have no labor income. »
He noted that spending in households of those over age 60 fell in December, which spending of younger households rose slightly.
The aging and shrinking of Japan’s population is countering efforts by the central bank and government to rekindle demand and sustain stronger levels of growth, said Bill Adams, an economist with The PNC Financial Services Group.
Even though Japanese businesses are increasingly short-handed — some fast-food outlets and convenience stores have stopped operating round-the-clock due to a lack of staff — wages are just not rising, and families tend not to spend more than they have to.
Japan’s unemployment rate remained steady at 3.1 percent in December, and averaged that level for all of 2016, the lowest in 22 years. The number of jobs available to job seekers rose to 1.43, the highest level since 1991.
« Japan’s shrinking labor market means that even with real GDP growth of barely more than 1.0 percent, its economy is growing above potential, tightening the labor market, » he said. But « Offsetting a labor market that is cyclically hot and getting hotter is Japan’s incredibly weak demographic makeup. «
