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Japan demand still weak despite negative rate policy

Gusto, a family-style restaurant chain, offers its daily lunch special for only 499 yen plus tax.

TOKYO -- Weak domestic demand is slowing the recovery pace of the Japanese economy. The negative interest policy, introduced by the Bank of Japan in February, appears to have brought little positive impact so far.  

     Since Prime Minister Shinzo Abe took office for the second time in 2012 and launched his economic stimulus policies known as Abeonomics, Japan's economy has gradually improved. The uptrend has been largely thanks to strong domestic consumer spending and capital investment by businesses, but without much improvement in wages, Japanese households have again tightened their purse strings. 

     Tighter consumer spending could instantly affect the restaurant industry. Gusto is an inexpensive family-type diner chain operated by Skylark, a leading restaurant operator. The chain in February strengthened its value lunch menus in the range of 500 yen to 600 yen ($4.6 to $5.5), including an upgrade of its lunch of the day, which costs only 499 yen plus tax. Amid higher ingredient costs and expectations of pay raises, restaurants have competed to introduce slightly more value-added, "luxurious" dishes in the last year. But these promotions have diminished recently.

     After several years of increases, the average propensity to consume of Japanese households in 2015 has declined 1.5 percentage points on the year to 73.8%, the level in 2012, before the advent of Abenomics. The figure refers to the percentage of income that is spent on goods and services rather than on savings, compared to the total household income.

     Business environment has changed, says Toyota Motor President Akio Toyoda. Japanese business executives are struggling with both domestic and overseas challenges, from weak consumption to strong yen to tumbling stock market. According to a forecast by SMBC Nikko Securities, Japan's leading brokerage, the combined pretax profit of 250 leading businesses for the ending March 2017 will be up a mere 3% from the previous year.

     These circumstance have begun affecting once-stable capital spending by businesses. Maruichi Steel Tube, a leading manufacturer of welded steel tubes for buildings, had planned to spend 15 billion yen during fiscal 2015 through fiscal 2017 ending March 2018 on updating its aging facilities. However, hit by weakening domestic demand, it will probably take four years, instead of three, to complete the renewal, according to Chairman and CEO Hiroyuki Suzuki.

     The real growth rate of the economy for the January-March quarter, due to be released on May 18 by Japan's Cabinet Office, will likely post a second straight decline because of weak domestic demand.

     International Monetary Fund Chief Christine Lagarde earlier this month suggested the IMF may revise down the 3.4% forecast of global economic growth for this year, which it made in January.

     The Chinese economy has been blamed as the center of global turmoil. And the future of its recovery remains uncertain. The situation of struggling heavy industry manufacturers -- many of which are burdened by excessive facilities and inventories -- is getting even worse. Tokyo-based Toritsu Electric does a thriving business providing China with industrial heaters used for melting plastic. Takahisa Kato, who heads the business, said the number of orders from China has declined sharply since September.

     Despite the many difficulties, one bright spot is the robust job market in Japan. At the country's annual wage negotiations, typically conducted in springtime, pay raises among small to midsize businesses, as well as for nonpermanent workers, are reported to be improving. Mitsumaru Kumagai, chief economist at Daiwa Institute of Research, predicted that consumer spending will not weaken further.

     Likewise, it is unlikely that businesses will cut capital spending drastically. And even in a deteriorating profit environment, companies may spend money on a specific field in which they are strong. Kyocera, for example, plans to open a factory to make plastic substrates for smartphone chips. Thanks to the higher performance of the latest devices, the number of parts required for smartphones is increasing.

Negative interest 

What about the effects of the BOJ's negative interest rate policy?

     One new home display site near Tokyo is a good indicator. The facility has been seeing an increase in visitors thinking of buying houses, especially in weekends lately. Sales representatives of the house builder that runs the site are strongly emphasizing the fact that interest rates on housing loans are rock bottom, and someone who buys now could save several million yen compared to the rate 10 years ago.

     Since January, as housing loan interest rates have dropped to historic low levels, mortgage holders have begun to refinance their loans. Combined applications for refinancing at five major Japanese banks in March surged to about 20,000, some 3.7 times the level a year earlier.

     The central bank hopes the new policy will encourage borrowing by businesses and individuals, and eventually boost investment and consumption. It has managed to stimulate the housing market, but it has yet to make a visible impact on the real economy.

     An executive of a leading supermarket chain said his company's sales began slowing along with the introduction of the negative interest-rate policy. The executive is concerned that the new, unfamiliar policy may be discouraging shoppers from spending money. Consumers may be confused by the word "negative." Or the unusual monetary policy may have sparked fear that the Japanese economy could be much worse than they thought.  


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