A volatile economic situation is becoming increasingly conspicuous mostly because of China’s economic slowdown.
The latest diffusion index for March released by the Cabinet Office tilted downward. The government uses the diffusion index to mechanically make asses underlying trends in the economy. The administration lowered the assessment to “worsening” for the first time in six years and two months
Prime Minister Shinzo Abe has presented the view that Japan is going through its longest economic recovery in the postwar period. However, the government’s latest assessment suggests this view might have been “illusion.” We still have to wait for the government to release its official economic assessment in its monthly economic report at the end of May. However, we cannot overlook the indication of an economic downturn.
People will urge the government to take economic measures. There will be more debate about whether the government should raise the consumption tax as scheduled for October. However, we need first to discern the extent of the economic downturn and respond to the current situation cool-headedly.
On May 13, the U.S. announced its sanction measures against China — the imposition of up to 25% tariffs on another $300 billion of Chinese imports. This is an additional sanction measure following the previously expanded measure. If invoked, almost all imports from China will be subject to sanction measures. China has already imposed retaliatory tariffs on the U.S. imports in response to the previous sanction measure by the U.S. Stock markets have entered a turbulent period.
The problem is that at present we don’t know whether the U.S. and China can put an end to their tit-for-tat retaliation or to the stagnation of their trade. Answers to these questions will significantly impact the business environment surrounding Japanese companies.
Even if the two countries prolong their trade war, the U.S. economy may remain strong. China will take some effective economic measures. Some Japanese companies are preparing to move their production bases to countries outside China. They may be able to mitigate risks to some extent. Until the effect of these measures becomes clear, we should not be too pessimistic about the current situation.
The diffusion index shifted downward because the production and shipment of semiconductor manufacturing equipment and automobile-related business have fallen. But that does not necessarily mean Japan’s entire economy has collapsed.
Listed companies’ settlement of accounts in the business year ending on March 31 are expected to show a decline in profits. However, the level of profitability of many companies remains high. Consumer spending that underpins domestic demand maintains underlying strength.
We are concerned that if companies are excessively worried about the future, it could affect business expectations, which would diminish investor confidence. As a result, the economy could lose pace.
The government must, of course, take necessary measures to support domestic demand. At the same time, businesses should make efforts to reform companies to improve their productivity. Companies should keep this in mind to prevent the current economic “deterioration” from becoming rooted.