Japan Economic Outlook

■  Real wages may reach lowest level since 2000

 In Japan, the economy is firming up as restrictions are further eased to normalize economic activity. However, the outlook for manufacturing and non-manufacturing has become more cautious as the external environment has deteriorated, and rising prices have reduced real household incomes.

 Production is increasing amid easing global supply constraints, with industrial production (August: +3.4% mom) significantly higher than before the covid outbreak. The Tertiary Activity Index (August: +0.7% y/y) also rose for the first time in three months, with non-manufacturing industries, mainly face-to-face services, recovering as new viral infections peaked (Figure 1). However, the DI (current: plus 8, future: plus 9) for business conditions of large companies and manufacturers fell for the third consecutive quarter in the Bank of Japan's September short-view survey due to higher costs and sluggish external demand, and the momentum for future improvement in business conditions is slow. In addition, among the actions to accelerate the recovery of economic activity, including the deregulation of immigration, business conditions in the large non-manufacturing sector DI (current: positive 14, outlook: positive 11) increased from the previous survey, but the outlook declined from the current situation, indicating caution about postponing the recovery after the demand run.

 As the consumer price index (September: +3.0% yoy overall and 3.0% yoy core, excluding fresh food) continued to accelerate, the real wage index declined rapidly (Chart 2), even though total cash wages (August: +1.7% yoy) had been above the previous year's level for eight consecutive months. The depreciation of the yen has not stopped, price inflation is expected to continue for the foreseeable future, and real wages are approaching their lowest levels since 2000.

 The government is scheduled to approve a comprehensive economic stimulus package with a project size of 71.6 trillion yen and spending of 29.6 trillion yen at a cabinet meeting on the afternoon of 28th, mainly to combat high prices. In late October, the Bank of Japan decided to leave its monetary policy unchanged on October 28, although it appeared to intervene to buy yen as it did on the 22nd of last month, further underscoring the divergence between domestic and foreign monetary policy stances that is responsible for the yen's weakness.