Japanese economic conditions improving as lending surges

Emily Nicol
Chris Scicluna

While China’s stock markets made further gains (the CSI300 rose 1.6% today), following yesterday’s decline on Wall Street elsewhere the market mood has been less vibrant, as unease about the pandemic raises questions about recent gains. So, for example, Japan’s Topix fell 0.9% despite a better domestic economy watchers’ survey (see below). And despite more upbeat commentary from France’s INSEE agency mirroring yesterday’s optimism about the state of the domestic economy from the country’s central bank, European equities have opened lower too. IN bond markets, following yesterday’s gains, USTs are only a touch softer, with 10Y yields still slightly shy of 0.65%. And like euro area govvies, Gilts are 1-2bps more expensive across the curve ahead of the UK government’s announcement of new (targeted rather than large-scale) fiscal support due later today.

The BoJ’s various funding programmes to support firms struggling through the current crisis appear to have fed into a sharp acceleration in lending over recent months. In particular, the total amount of outstanding loans rose a further 1.3%M/M in June to push the annual growth rate up 1.4ppt to 6.5%Y/Y, the strongest since the monthly series began in the early 1990s and almost 2½ppts higher than the peak during the global financial crisis. While growth was strongest among major banks, up 8.6%Y/Y, there was a further increase in lending from regional banks too, up 4.6%Y/Y, albeit merely the firmest rate for a year. Concomitantly, deposits rose by more than double the increase in loans last month, to leave them up 8%Y/Y, the strongest annual growth since the series began.

Meanwhile, although the recent flow of activity and spending figures has suggested that Japan’s economy continued to struggle when the state of emergency was lifted in May, the latest economy watchers survey, also published today, hinted at some signs of recovery in June. Indeed, the headline current conditions balance jumped 23.3pts to 38.8, the firmest reading since January and 31pts above April’s trough. And the improvement was reportedly broad based. The corporate-related demand DI rose 20pts to 30.4 and the household-related demand DI rose 36pts to 43.3 as the retail sector balance jumped to its highest since before the consumption tax hike last October. Of course, most survey indices remain well below levels seen before the pandemic suggesting that economic conditions remain challenging for large swathes of the economy. Indeed, the severe flooding across southwestern Japan earlier this week saw several manufacturing plants close – affecting Toyota, Mitsubishi Chemical, toilet maker Toto, Canon and Panasonic among others – and disrupted postal deliveries, representing a new source of supply-side disruption on top of ongoing weak demand.

Ahead of today’s announcement of extra policy support by Chancellor of the Exchequer Sunak, the latest REC/KPMG report on jobs, which provides insights from job recruitment and employment consultancies, shone light on the troubled conditions in one section of the UK labour market. In particular, the survey reported another fall in hiring activity for both permanent and temporary staff last month, as firms continued to put on ice or shrink their recruitment plans due to the impact of the pandemic on economic activity. However, the pace of decline was much more moderate than in the prior two months, which saw record weakness. Overall demand for staff also fell at a somewhat softer pace. At the same time, however, labour supply increased at the sharpest rate since the global financial crisis in 2009, as newly-redundant and furloughed workers sought work. And the Bank of England will note the finding of the survey that this glut of labour added significant downward pressure on pay.

Of course, it’s not news that the UK labour market is in a dark place. According to the ONS’s latest Business Impact of Coronavirus Survey (BICS), 23% of the workforce were still on furlough in the second half of June, with almost 12mn workers receiving government support from either the Job Retention Scheme or the equivalent scheme for the self-employed. And despite those policy programmes, the number of redundancies – particularly in retail and hospitality – has been accelerating. Young people have been disproportionately affected: according to the Resolution Foundation, 3-in-10 18-24 year olds have been furloughed and 1-in-10 have already lost their jobs. So, among his new range of targeted measures of support to be announced today, Chancellor Sunak will today confirm details of a new £2bn “Kickstart” programme of subsidised work placements for young workers at risk of long-term unemployment.

Given the UK’s delayed entry into lockdown, the lagged relaxation of those measures too, and the greater persistence of the pandemic in England too, all the evidence suggests that the UK economic recovery is now lagging that of the euro area. However, Sunak has downplayed expectations of a significant further fiscal stimulus today, with reports suggesting that a big German-style across-the-board cut in VAT will not be forthcoming. However, targeted temporary tax cuts seem likely to be in order and should not be sniffed at. Reports have mooted a stamp duty holiday on purchases of homes costing up to £500k to get the housing market moving and prompt associated purchases of furniture and appliances. And a VAT cut targeted on the ailing hospitality sector might also be in order. In addition, public investment and subsidies for “green” spending will also feature prominently. But the overall size of the package might appear modest compared to the drop of more than 15% in UK GDP likely to have occurred last quarter. So, while sterling might get some extra support from the announcements, the Gilt market seems likely to be untroubled.

US/Euro area:
In the US, today will bring consumer credit figures for May, while the Fed’s Bostic will speak at an online event discussing the US economy. Meanwhile, there are no top-tier economic data due from the euro area.

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