RaboResearch - Economic Research

Japan: The reign of Suga

Economic Comment

  • Yoshihide Suga has been elected as Japan’s new prime minister
  • Suga’s choice of cabinet member signals policy continuity and conformity
  • Suga will likely maintain most of Abe’s polices and try to balance the various interests within his party
  • International relations with China are not likely to improve much
  • Another round of fiscal stimulus is possible
  • The economy is starting to recover, but remains quite weak
  • We still expect Japan’s economy to shrink by 4.9% this year
  • We also still think the Bank of Japan will remain in wait and see mode for now

The sweet and sour of Suga’s power

As widely expected, Yoshihide Suga was elected as Japan’s new prime minister on September 16, comfortably winning with 70.5% of the 535 possible votes from government officials. Suga quickly moved to appoint his new cabinet. The cabinet appointments signal two things: policy continuity and conformity. Regarding the first, Suga has retained many of the ministers of Abe’s cabinet, amongst which important posts such as those of Finance minister (Taro Aso), Foreign Affair minister (Toshimitsu Motegi) and Economy minister (Yasutoshi Nishimura). Regarding the second, the choice of cabinet appointments is well balanced across the various factions (subgroups) within the ruling Liberal Democratic Party (LDP). So Suga seems to be intent on managing the various interests within the LDP, being a conformist rather than a fierce reformer.

Nonetheless, some reforms are definitely on Suga’s mind. He has appointed a new minister responsible for digital policy. That is a welcome development, given that Japan has a relatively high reliance on ‘old’ technologies such as fax machines, the use of which is sometimes implicitly required by law. Reforms on this dimension are a quick win. Less of a quick win will be reforms to further increase female labour market participation or policies to further improve the corporate governance of listed firms. Whether Suga will achieve these reforms partially depends on his ability to stay in office long enough. This is anything but a certainty, especially with general elections coming up in October 2021.

On the foreign policy front, Suga has rapidly started talking with Putin and Xi on improving ties. We do not expect marked improvements of ties with China however. Suga will be mindful not to alienate the China hawks within the LDP or alienate the US (with whom Japan has strong military ties). Both limit how far Japan can go in improving its relations with China. Moreover, Japan still has an ongoing border dispute with China regarding the Senkaku Islands.

Suga has repeatedly said that his focus right now is to fight COVID-19. Suga might want to back his promise with actions, possibly in the form of more fiscal stimulus. Given the already huge sizes of Japan’s previous two stimulus packages, a possible third package will likely be smaller, and might include further dipping from an already existing JPY 10 trillion-reserve fund to fight a second wave of coronavirus infections.

Economics: a bit better, but still bad

The macroeconomic picture continues to show weakness, which is understandable because coronavirus infections are still increasing in Japan, albeit at a slower pace. Rising infections lead to more voluntary social distancing and weaker consumer sentiment. The latter continues to be below levels seen during the Great Financial Crisis, despite an initial bounce back in June and July (Figure 1). Retail sales (another indicator of consumer demand) have also not recovered fully. Although the August figure increased by 4.6% m/m, it is still down by 2% y/y. The same holds for industrial production, which marginally increased in August by 1.7% m/m, but was down 12% y/y.

Meanwhile, unemployment has kept increasing (to 2.9% in July) while the jobs-to-applicants ratio has kept decreasing (1.08 in July), both pointing to labor market weakness. That in turn, will weigh on consumer demand going forward. The external environment is not providing much relief either. Although Japan’s exports in nominal terms rose 6% m/m in August, they are still down 12% y/y. In fact, exports have been consistently lower than last year since the beginning of this year (Figure 2).

All in all, we think that the positive effect of a possible third round of fiscal stimulus could very well be countered by a weaker than expected recovery, which is why we stick to our belief that Japan’s real GDP will decline by 4.9% this year.

Figure 1: Consumer sentiment is still very weak…
Figure 1: Consumer sentiment is still very weak…Source: Macrobond
Figure 2:…as is the external environment
Figure 2:…as is the external environment Source: Macrobond

BoJ: a little more optimistic

The BoJ did not alter its monetary policy at its meeting on 16 and 17 September. The Summary of Opinions reveals that the BoJ was a bit more upbeat about Japan’s economic prospects, mentioning that the economy “already has bottomed out and is gradually recovering”. However, the BoJ recognized that the recovery is moving slower than during its previous meeting.

The Summary also shows that the BoJ is thinking about reviewing its policy approach, as its 2% inflation target seems increasingly far away. With regard to the Fed’s decision to target average an average inflation rate, the BoJ said that it already targets an average inflation of 2% over the business cycle. With that statement, the BoJ seems to be signaling it will not change its monetary policy approach (at least in terms of inflation targeting) anytime soon.

We continue to think the BoJ will remain in wait and see mode for now. The BoJ already has a huge monetary stimulus package in place, of JPY 110 trillion (USD 1 trillion), and will likely await the new cabinet’s plans before moving.

Meanwhile, Japan is, again, facing the risk of deflation. The BoJ’s preferred measure for core inflation (which excludes fresh food, but includes energy) came in at -0.4% y/y in August. The BoJ expects this to improve as the economy recovers, although it still expects inflation to remain negative for the time being.

We agree that with the latter, but are less optimistic about the former. Given Japan’s rapidly ageing population and entrenched weak inflation expectations, we expect inflation to stay low for years to come.

Table 1: Economic forecasts
Table 1: Economic forecastsSource: RaboResearch
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864

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