Guard against U.S.-China trade friction and yen’s appreciation

The Yomiuri ShimbunBusiness sentiment among manufacturers continues to deteriorate. While closely observing global economic trends, the government and the Bank of Japan should aim at guiding robust growth led by domestic demand.

The Bank of Japan has released its short-term economic survey of enterprises in Japan for June. The diffusion index (DI) for business sentiment among large manufacturers stood at plus 7, down 5 points from the previous Tankan report for March.

Marking a second consecutive quarterly fall, the figure is at the lowest level since September 2016.

Due to U.S.-China trade friction and other factors, the indexes for business sentiment among production machinery and motor vehicle manufacturers have deteriorated markedly. With the downswing also having affected their subcontractors, the index for business sentiment among small manufacturers dropped 7 points to as low as minus 1.

Although the United States and China at a June 29 summit agreed on the resumption of bilateral trade talks, prospects remain dim for their trade friction to be resolved. The Japanese government and domestic companies should look closely at the impact trade friction has been having on their global supply chains of parts and components.

According to the Tankan survey, large manufacturers have made their operation plans for fiscal 2019, with the assumption of exchange rates through the fiscal year at a level of ¥109 to the U.S. dollar. As the exchange rate currently hovers at around ¥108 to the dollar, further appreciation of the yen will push down their business performance.

As speculations of an interest rate cut by the Federal Reserve have risen in the United States, the Japanese market is shaping up for a situation in which the yen is likely to rise further. The government and the central bank need to be watchful of exchange rate movements and make efforts to handle policy management flexibly.

Bolster domestic demand

In the latest Tankan report, the current-sentiment DI for large nonmanufacturers, many of which are enterprises driven by domestic demand, rose 2 points to plus 23. The indexes rose among such sectors as retailing, accommodations, and eating and drinking services. The upturn has been partly due to an increase in demand during the Golden Week holidays.

As the effect of the long holiday season is temporary, however, the sentiment DI forecast three months hence shows a 6-point drop. Precaution is needed when it comes to future prospects.

In October, the consumption tax rate is slated to be raised. All possible measures need to be taken to underpin domestic demand.

If the nation’s social security system becomes stable thanks to the consumption tax rate hike, the general public’s anxieties about the future are expected to be mitigated. When viewed from a long-term perspective, the tax hike ought to have a positive effect on consumption. Any difficulty stemming from the tax hike should be overcome smoothly.

With the tax rate hike imminent, the government has decided on economic measures worth in excess of ¥2 trillion.

A reduced tax rate for some items and a reward points system to be applied for cashless settlements for purchases to be made at small and midsize retailers, for instance, would bring benefits that can be felt more tangibly by consumers. The government should check to ensure preparations at retailers have been making progress.

In order to revitalize consumption, raising pay levels is also essential. In its Basic Policy on Economic and Fiscal Management and Reform, the government has incorporated, as a pillar of the policy, increases in minimum wages.

Yet in the Tankan, the deterioration in the business sentiment among smaller enterprises is distinct. It would be the reverse of the government’s intention if a sharp increase in pay impacted smaller companies, thus cooling the overall economy. Appropriate levels of pay hikes should be found.

(From The Yomiuri Shimbun, July 2, 2019)Speech


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