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Japan Maintains Recovery on Track

The Japanese government says capital expenditure is picking up.The Japanese government says capital expenditure is picking up.

Japan’s government maintained its moderately optimistic view on economic growth in October, indicating that a recovery remains on track due to increased consumer spending and capital expenditure.

In its monthly economic report for October released on Wednesday, the government also maintained its optimism that exports and industrial output will continue to drive growth in the world’s third-largest economy, Reuters reported.

“Japan’s economy continues to recover moderately as a trend,” the Cabinet Office said in the report, maintaining its assessment for the fifth straight month. The government kept intact its view that consumption is “picking up moderately” as shoppers continue to buy new cars, clothes and luxury goods.

The government said capital expenditure is “picking up”, unchanged from the wording it used a month earlier, reflecting gains in machinery orders and shipments of capital goods. The report also said exports and output are “picking up”, again the same assessment as last month, as demand from overseas economies remained firm.

The Cabinet Office report comes one week before a Bank of Japan policy meeting on Oct. 30-31 where the central bank will update its consumer price forecasts. Currently, the BoJ predicts that consumer inflation will hit its 2% target by March 2020, but this is looking increasingly unlikely.

The BoJ is in a bind, because the economy has performed well this year due to domestic and external demand, but inflationary pressure has not increased much.

Despite four years of massive quantitative easing, core consumer prices are forecast to have risen only 0.8% in September from a year ago, less than half the BoJ’s inflation target. The government will release the CPI data on Oct. 27.

Meanwhile, Japan’s government is considering expanding tax incentives for companies to encourage them to raise wages, three people involved in discussions told Reuters, as many firms remain hesitant to spend their cash reserves on salary increases.

The current incentives are set to expire at the end of this fiscal year through March 2018. The government wants to continue them and expand them, said the sources, who declined to be identified because they are not authorized to speak to media about the matter.

But despite a tight job market, companies are reluctant to raise wages out of concern they will not be able to pass on the costs to customers who are accustomed to two decades of mostly falling prices.

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