Monthly Economic Report from the Cabinet Office for December

December 20, 2007
By Ken Worsley

Each month, the Cabinet Office issues its assessment of the economy in its Monthly Economic Report. The executive summaries are usually very short and to the point - perhaps too much so. Last month, the report began by stating, “The economy is recovering, while some weaknesses are seen recently.” This month, the first line shows a bit of a downgrade in assessment, declaring, “The economy is recovering, while some weaknesses are seen.”

The main points of the report are:

Corporate profits improvement appears to be pausing and business investment is increasing moderately.
The employment improvement appears to be pausing recently while some severe aspects remain.
Private consumption is almost flat.
Housing construction remains at a low level while it has almost stopped decreasing.
Exports are increasing and industrial production is increasing moderately.

We’re not going to look at all of these points here, but there are a few things to comment on. First, there is no mention of increased producer prices, particularly with regards to oil - and not only are oil prices up, but the volume of imports in November was over 15 percent higher than the volume last November, according to the Ministry of Finance. There is also no mention of increased food prices, which may further stunt household spending figures. We also see no mention of the lack of growth in wages, and the effect that could be having.

What makes wage growth potential interesting, however, is that Keidanren (the Japan Business Foundation) seems to be somewhat open to the idea of encouraging increased wages in upcoming Spring negotiations (known as the shunto). At the same time, lower profit forecasts at many firms will make it difficult to raise wages. In 2007, we saw slightly less than a 2 percent increase in average wages at major corporations. With 70 percent of the workforce employed at small and medium sized firms, will we see the majority of the workforce passed over for raises again in 2008?

We should also point out that the Cabinet Office announced on Wednesday that it forecasts 2.0% economic growth for fiscal 2008. We’re really not sure where this figure comes from. We remember projected economic growth for fiscal 2007 having been set at 2.1 percent, and there’s no way that’s possible. We think Japan could be looking at something as low as 1 percent once FY2007 wraps up. For FY 2008? Well, we already know that Takehiro Sato, Morgan Stanley’s chief Japan economist, is forecasting 0.9% growth in FY2008.

What also made us squint was the government’s assertion on Wednesday that the slump in new housing and construction will pull GDP down 0.6% on the year for FY2007. We’re not sure how this figure was arrived at, but it seems overestimated. If the 0.6% from lost housing starts is added back in, we might not be too far off from the government’s initial FY2007 projections…and we simply don’t think that the economy has performed well enough outside of this one sector to be considered so healthy.

Filed Under Cabinet Office, Economic Reports, Economics