Japan’s government upgraded its economic assessment for the first time in 17 months, citing a recovery in consumer spending and business activity as the COVID-19 situation improved.
Consumer confidence rebounds
The government raised its view on private consumption for the second consecutive month, saying that it was picking up as severe conditions due to the coronavirus were gradually easing. The services sector, which includes restaurants, entertainment and tourism, was especially boosted by the lifting of pandemic restrictions in September.
According to the government, car sales also rebounded as supply constraints eased, reflecting a global recovery in auto production. Private consumption accounts for more than half of Japan’s gross domestic product (GDP) and is a key driver of economic growth.
Business conditions improve
The government also upgraded its view on business conditions, following the Bank of Japan’s (BOJ) quarterly tankan survey that showed a near two-year high in business confidence among big manufacturers and a two-decade high among big non-manufacturers.
The BOJ survey, which is closely watched by policymakers and market participants, indicated that companies were benefitting from strong domestic and overseas demand, as well as rising prices. The survey also showed that firms maintained their robust capital expenditure plans for the current fiscal year, suggesting that investment will support the economic recovery.
Employment situation tightens
The government also raised its assessment on employment for the first time in 15 months, saying that the labour market was tightening as job openings increased. The BOJ survey also revealed that both manufacturers and non-manufacturers faced staff shortages, which could put upward pressure on wages and inflation.
The government said that it was necessary to closely monitor the impact of coronavirus variants, such as Omicron, on the global economy and financial markets. It also flagged downside risks from supply chain disruptions and fluctuations in raw material prices, which could affect corporate profits and consumer sentiment.
Outlook for the fourth quarter
Japan’s economy contracted slightly more than initially estimated in the third quarter, as a surge in COVID-19 cases dampened consumer spending and exports. However, economists expect a strong rebound in the fourth quarter, as the easing of pandemic curbs boosted domestic activity and external demand.
The government’s stimulus package, which was approved by the parliament on Monday, is also expected to provide a further boost to the economy in the next fiscal year. The package, worth a record US$317 billion, includes payouts to households and businesses, as well as measures to combat the pandemic and promote green and digital transformation.
