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Cabinet Office’s May Report on the Economy: Not Exactly Good News

In its monthly economic report, the Cabinet Office has downgraded its outlook on the US economy for the first time since November 2006. According to the report, slow first quarter growth in the US economy can be attributed to a slowdown in the housing market. However, Minister of State for Economic and Fiscal Policy stated that she does not expect the US economy to head into a tailspin.

What does all this mean for Japan? Any slowdown in the US economy threatens the pace with which Japan’s exporters have been expanding their revenue. Although April’s trade statistics are expected to show another strong increase against those of April 2006 (we are projecting 6.5 trillion yen for April 2007 versus 6.13 trillion yen in April 2006), a slowdown on the comparison charts could hit in the late summer, when Japan’s exporters did fabulously last year. April proved to be the 64th consecutive month of economic expansion in Japan; could 70 be about the limit?

Back to the report: The Cabinet Office stressed that consumer spending is picking up again, though we would like to stress ‘just barely’ - consumer spending was up 0.9% in the first quarter of 2007. The report goes on to say that without sustainable increases in wages, it is difficult to determine if the increase in consumer spending will continue. Even if it does, this observer wonders if any increases in consumer spending, which are bound to be small over the coming six months, will make up for any potential slowdown in exports.

From 1997 to 2005, wages in Japan fell by about 10%. Last year they picked up about 0.3% and have since fallen in every month so far in 2007.

It might also be worth noting that in its January report on the economy, the Cabinet Office had this to say:

[In 2007,] the economic recovery will be driven by the private sector. Solid corporate profits will spread to households through improvement in the job market and wages.

The report also notes that production has decreased somewhat and that higher costs for raw materials has led to producer prices from being classified as ‘rising’ to ‘flat.’

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