ROUNDUP - March data show risk for corporate Japan; no urgent need for rate move
TOKYO (XFN-ASIA) - The latest data releases underscore the emerging downside risk for Japan’s corporations, which has supported the country’s economic recovery in recent years, while reaffirming a sustained turnaround of the household sector, but economists generally agree that there is no urgent need for the central bank to step up its interest rate adjustment amid a patchy economic outlook.
Government data showed that household spending rebounded for the third straight month, recovering from the fall-out seen back in mid-2006, amid relatively warmer weather conditions, while the corporate sector appears to be facing some greater downside risk due to ongoing inventory adjustments in the IT sector and a slowdown in US demand.
Consumer spending accounts for about 55 pct of the Japanese economy, while the corporate sector contributes about 15 pct to GDP.
With consumer prices also expected to continue easing, the Bank of Japan may find it difficult to convince the market of the pressing need to adjust interest rates aggressively, economists said.
The Ministry of Economy, Trade and Industry this morning announced that the output of factories and mines fell a seasonally-adjusted 0.6 pct to 107.2 points in March from February, missing the consensus forecast. Economists here had forecast a 0.9 pct increase for March.
As inventory adjustments in the IT sector continued in the January-March quarter, industrial output fell 1.4 pct from the previous quarter, the first sequential fall in six quarters, following a gain of 2.2 pct in the three months to December.
“The unexpectedly large drop in March output seems to suggest that due to the ongoing inventory adjustments in the IT sector and a moderation in US demand, industrial output may be at risk of a steeper-than-expected and a longer than previously thought adjustment going forward,” NLI Research Institute senior economist Taro Saito said.
“And depending on developments in the US economy, we may have to worry about the risk of inventory problems, which have so far been limited to the IT sector, broadening to affect non-IT sectors,” he added.
The inventory index, which the Bank of Japan closely monitors to see if there is any inventory adjustment risk, rose 1.8 pct to 101.4 in March from February, rising for the seventh month over the past nine months and was the highest level since December 2005 when the index stood at the same 101.4.
Takeshi Minami, economist at Norinchukin Research Institute, agrees with Saito’s view to a large extent, but stressed that he thinks the corporate sector is immune to the risk of a serious downtrend, citing a relatively firm outlook.
METI said industrial output is forecast to rise by a mere 1.5 pct in April and by a further 1.4 pct in May, convincing economists that industrial output would show a quarter-on-quarter rise in the April-June period.
“It is true that industrial output is weakening somewhat on the back of de-stocking in the IT sector and a slowdown of the US economy, but it is also evident that against the odds, the electronics device sector is doing relatively well,” Minami said.
“Unless the US economy falls into a hard-landing, the corporate sector, even if they face some rocky roads in the near-term, would be able to avert slipping into a fully-fledged downward cycle,” he added.
And despite the corporate sector’s slowing output, economists noted that the household sector has showed major improvements of late.
The Ministry of Internal Affairs and Communications said that spending by households in March rose 0.1 pct in real terms from a year before to an average 313,563 yen, rising for the third month in a row.
The government also reported that the unemployment rate remained at 4.0 pct for the fifth consecutive month in March as the medical sector, as well as restaurant and hotel operators took on more workers to deal with increased demand.
But economists are less bullish that the household sector would be able to replace corporate production as Japan’s engine of recovery.
“Should the downside risk faced by the corporate sector, which has been slow in passing on the benefit of robust profit growth to the household sector in the form of wage increases, materializes, it is difficult to expect household spending to maintain the recovery going forward,” said NLI’s Saito.
As corporate Japan undergoes inventory adjustments, the Ministry of Health, Labor and Welfare said that for every individual seeking work, there were 1.03 job openings in March, down from 1.05 in February. Economists had expected, on average, a ratio of one to 1.05 for last month.
Economists concede that given uncertainties over the US economy and its impact on corporate Japan, as well as the prospect of tame inflation, the BoJ may have to sit back for the time being before hiking interest rates.
The government said the core consumer price index, which excludes volatile prices of fresh food but includes energy prices, dropped 0.3 pct in March from a year earlier, the second straight monthly fall.
The core CPI was flat in May 2006 but rose year-on-year between June and December last year, before turning flat again in January this year amid declining crude oil prices.
“Given the downside risk of the cyclical trend of the economy here, and the possibility of a bigger year-on-year decline in CPI ahead, the BoJ may not be able to resume a rate adjustment until around the January-March quarter of 2008,” Mitsubishi UFJ Securities senior economist Tatsushi Shikano said.
But Hiromichi Shirakawa, chief economist at Credit Suisse, holds a different view.
Shirakawa sees the chance for an early rate hike, possibly before the upper house election in July, citing the recent upbeat outcome of the annual survey on land prices.
The annual survey conducted by the Ministry of Land, Infrastructure and Transport showed that the average price of residential property in Japan rose 0.1 pct in 2006, while the average price of commercial land jumped 2.3 pct.
(1 usd = 119.65 yen)
yasuhiko.seki@xfn.com