The Japanese Economy may overcome obstacles and keep its recovery on track

Foreign visitors to Japan plunged to record low harming tourism in Japan

Japan confirmed 102,333 new COVID-19 cases on February 5, for the highest daily count although the speed of infections is gradually slowing down and some researchers think it is peaking out. 

The spread of coronavirus infection is affecting the tourism industry again. Travel restrictions to prevent the spread of COVID-19 have throttled Japan's tourism industry with the estimated number of foreign visitors plummeting to an all-time low of 245,900 in 2021. 

The number of guests who stayed at hotels and other accommodation facilities in Japan hit a record low last year for the second straight year because of prolonged border controls and a slowdown in the recovery of domestic travel demand. The cumulative total of guests at hotels and inns was 315.75 million in 2021, down 4.8 percent from 2020 and 47.0 percent from 2019, according to preliminary data recently announced by the Japanese government. 

The number of passengers on the Shinkansen bullet trains and express trains operated by JR companies during the year-end and New Year holidays in FY 2021 increased 2.5 times from the year-end and New Year holidays in FY 2020 to 8,938,000. However, it is still about 75% of that before the pandemic. 

Passengers of the Tokaido Shinkansen operated by Central Japan Railway during the year-end and New Year holidays in FY 2021 also remained sluggish compared to the same period in FY 2019. The outlook for the number of passengers continues to be bleak as Japan scrambles to curb the spread of the now dominant omicron variant of the coronavirus. In addition, different forms of the variant are on the rise, casting a shadow over the quasi-emergency measures currently in place in many prefectures across the country.

Japan's economy likely rebounded in the final three months of 2021 although uncertainty looming ahead

Despite surging infection rates in recent days, the Ministry of Finance raised Japan's economic assessment in January for the first time in a year and three months. In addition to strong consumer spending, the supply chain disruptions by the coronavirus disease are being mended and economic activities such as automobile production are showing signs of picking up. 

The report　of assessment was compiled at the meeting by directors of ministry's local finance bureaus to check regional economic conditions in the past three months.  The ministry upgraded its overall economic assessment for the country for the first time in five quarters saying the Japanese economy is picking up gradually. 

The upward revision was the first since October 2020. By region, economic assessment was raised in 9 regions excluding Tohoku and Okinawa out of all 11 regions in Japan. Production activities are picking up in the areas of Tokai, Chugoku and Kyushu where automobile production bases are concentrated. The effects of semiconductor supply shortages in the automobile industry are improving and production levels are returning to pre pandemic level.

Solid consumption and industrial output boosted Japan's economy in Q4

As for personal consumption, sales at supermarkets and drug stores are brisk and new car sales are also picking up. The sales of department stores nationwide in December 2021 announced by the Japan Department Store Association was 592 billion yen with same-store sales increasing by 8.8% year-on-year, surpassing the previous year's results for three consecutive months. 

In December, with the number of newly infected people subdued, consumers were motivated to go out and spend. The year-end sales season was also booming and sales of luxury goods were strong. By product, sales of high-priced items such as luxury products with popular brand names, watches and jewelry as well as Japanese and Western confectionery fared well. 

Sales of department stores nationwide for the full year of 2021 were 4,418.2 billion yen. On an existing store basis, it increased by 5.8% year-on-year, turning positive for the first time in four years. 

Although there were adverse effects with consumers refraining from going out due to increasing COVID 19 infection cases and consumer sentiment getting dormant, consumption recovered from the last autumn to the year end when infection cases fell temporarily. 

The number of customers is recovering in service industry but after infection cases resurged, cancellations of reservations by corporates and group customers increased. 

As for the employment situation, job offers in the manufacturing industry are strong while labor shortages in accommodation, eating and drinking services continue. Japan's industrial output in 2021 grew 5.8 percent from a year earlier although it remained below its pre pandemic level amid a resurgence of infections and a global semiconductor shortage. 

The seasonally adjusted index of output at factories and mines increased with the fastest rate since comparable data became available in 2014, following the worst decline of 10.4 percent in 2020. The annual figure logged the first rise in three years since 1.1 percent growth in 2018, but the latest production level was far lower than the reading of 101.1 in 2019, before the pandemic began to weigh on the domestic and global economies. Japan's output recovery was slowed by a global semiconductor shortage and a suspension of parts production in Southeast Asia due to a surge in COVID-19 cases that dealt a blow to the auto industry. 

Japan’s government pays close attention on the downside risk amid rising material prices

However as for the economic outlook, the finance ministry said close attention should be paid to the downside risk amid concerns over the spread of the highly infectious omicron variant and rising raw material prices. 

Economists in Japan are also cautious about the outlook, referring to the recent sluggish recovery of the car industry as the spread of the omicron variant has forced some domestic companies to suspend production. After the supply side issues around September and October eased, the auto industry had been rebounding, but increase in December output was small and its level was still off from the recent peak in March. 

That indicates car production will likely remain at stagnant for the time being. However, the Bank of Japan revised up next fiscal year’s growth forecast and offered a more upbeat view on the economy than three months ago, taking in stride the recent spike in the omicron variant cases at least for the time being. 

The bank also flagged heightening chances the recent commodity-driven price hikes will broaden on Japanese economy, the latest sign of its conviction Japan is emerging sustainably out of deflation. 

With inflation set to remain below its 2% target in the coming years, the BOJ stressed its resolve to maintain its ultra-loose monetary policy even as its global counterparts move toward exiting from crisis-mode policies. The BOJ left unchanged a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0% at a two-day meeting in January.

Japanese corporates may be caught off guard by abrupt interest hikes

At the monetary policy meeting held by the Bank of Japan on January 17-18, some board members are concerned that consumer prices may rise to around 2% momentarily due to soaring resource prices. However, they support the idea to continue ultra loose monetary policy until the settlement of 2% inflation is confirmed. 

The consumer price index in December 2021 was up 0.5% year-on-year. Since the effect of the reduction in mobile phone charges will diminish from this spring, the consumer price index may temporarily approach 2% while companies pass on costs to consumers to cope with rising prices. 

The Bank of Japan has raised its inflation outlook for 2022 from the previous 0.9% to 1.1%. Due to high resource prices and supply constraints, prices of daily necessities including food and energy are rising one after another. 

In today’s Japan, the recovery of demand and the movement of wage increases are slower than in the United States and Europe, “inflation without growth", which is preceded by cost increases is concerned to be a burden on households. 

For example, the electricity bill increased by 13.4% in December, the largest increase in 40 years and 9 months. Kerosene and gasoline have also continued to rise by double digits, affecting households and a wide range of industries. 

If inflation of about 2% is prolonged, monetary policy changes to tighten the market such as a rate hike may suddenly appear in an unexpected way although the BOJ said it was in no rush to change its ultra-loose monetary policy. If that is the case, Japanese markets and companies that have become accustomed to ultra-low interest rate environment may face a difficult business condition without preparedness for sudden interest rate hikes.