Japan’s weak output, price and spending figures showed on Friday how the economy was struggling to cope with a strong yen and cooling foreign demand, raising doubts about the central bank’s relatively assured outlook.
Industrial production fell for the fourth straight month in September and the drop was deeper than expected, household spending fell from August and core consumer prices fell for the 19th month in a row.
Furthermore, manufacturers surveyed by the Ministry of Economy, Trade and Industry expect the slump to deepen this month with output falling 3.6 per cent after a 1.9-per-cent decline in September.
That led the government to say output was on a weakening trend, even though companies expect output to rise again next month and last month’s slump is largely blamed on the expiry of subsidies for low emission cars.
Such solemn view contrasts with the Bank of Japan’s more upbeat outlook published on Thursday. Its forecasts that economic growth would slow only slightly to 1.8 per cent in the next fiscal year from 2.1 per cent in the current year to March 2011 as well as its view that consumer prices will inch up next year, raised eyebrows.
“Judging from the data, the economy is already entering a downturn. This shows the economy won’t perform as well as the Bank of Japan predicted yesterday,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Governor Masaaki Shirakawa has made plain that the BOJ was ready to ease policy further if necessary. The central bank fleshed out the details of its ¥5-trillion ($61-billion) asset buying plan agreed earlier this month, but further deterioration of economic conditions could pressure the BOJ do more.
One shock might come as soon as next week in the form of the yen’s rally past its record highs if the U.S. Federal Reserve decides at its Nov. 2-3 meeting to pump more dollars into the economy than markets are now pricing in.
The Bank of Japan’s decision to move the next meeting from mid-November to Nov. 4-5 was taken by markets as a precaution in case the BOJ needed to respond to Fed action even as Shirakawa insisted the schedule change had nothing to do with the Fed.
But even if there is an increase in the pool of funds, the amounts are small change compared with hundreds of billions of dollars the Fed may be considering.
However, the prevailing view within the BOJ is that its own five-year campaign of flooding banks with cash, which lasted until March 2006, did little to stimulate growth. Therefore, ever since the outbreak of the crisis the central bank has been experimenting with smaller-scale, more targetted steps.
The pledge to keep rates pegged to the floor as long as there is no end of deflation in sight aims to prevent long-term bond yields, and thus actual costs for borrowers, from rising.
And by lowering by one notch the required rating of corporate bonds in its current scheme to triple-B, the lowest investment grade, the central bank says it hopes to encourage investors to take on more risks and help companies with weaker credit standing.
The BOJ also plans to buy riskier assets like exchange-traded funds and real estate investment trusts, which needs government approval. Finance ministry officials have said they will give approval as soon as possible.
In the past the BOJ has announced lending schemes targeting specific industries with higher-than-average growth potential.
Critics say, however, all that lacks scale needed to curb the yen’s strength, now the main threat for Japan’s export-dependent economy, and nothing short of a full-blown quantitative easing with large-scale government bond buying will work.
