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Plates and bowls of yakitori, sushi and tempura; queues of people waiting for a table under skyscrapers in Otemachi; ranks of salarymen heading to the myriad izakayas and karaoke bars of Shinbashi.

It is all part of the tapestry of office life in Tokyo where to the eye of a newcomer like myself, everything is thriving and busier than in many other major capital cities. But if you step back a little, the picture shifts a little — and for those waiting for the Bank of Japan to finally end its era of ultra-loose monetary policy, it is potentially more interesting.

According to new research from Goldman Sachs, Japan’s strong post-Covid recovery in consumption has “slowed considerably so far in 2023” to levels that are still 4 per cent below the pre-pandemic average. 

The problem is partly down to the effects of long-awaited higher inflation, with real incomes falling 3 to 4 per cent since 2022. But the more significant issue might involve changes to how people live and work brought about by the pandemic, says Goldman Sach’s senior Japan economist, Tomohiro Ota. 

By that he means the kind of things — such as fitness clubs and pachinko parlours, as well as the after-work restaurants and bars crowding the city — where consumption remains “stagnant”, or at least 10 per cent below 2018 levels on average this year.

Pubs and izakayas have seen spending fall by 39 per cent in the first half of the year compared with 2018, even as lockdown-friendly pursuits stayed buoyant and other sectors that suffered — like travel — bounced back. 

“The changes in the consumption patterns . . . make it feel like this time is actually different,” said Ota. “There has been a huge drop in group dinners, including for business, and that means a huge drop in drinking with clients. Group dinners in Japan usually include alcohol and this has just massively slowed down.”

Also watching the data closely are companies, including those in the beer business, that haven’t seen sales recover or food groups that are struggling with consumption being too weak for price increases. Retailers Lawson and Aeon started cutting prices on some products from last month, raising concerns about whether the recent trend for increase in product prices and wages will continue.

Entrenched working-from-home practices might not be the only reason for the slump. Ota thinks that the way Japanese people socialise might have structurally shifted since the pandemic, pointing to the fact that while reservations for group meals for business purposes are down by 50 per cent this year, the fall in restaurant traffic also extends into the weekend and holidays.

The first-order effect of all of these changes might seem prosaic: restaurants do fail, often at a higher rate than other businesses. And a reordering of demand is not necessarily a bad thing overall for the economy if people decide they would prefer to spend their money at home on takeaways and Netflix, instead of out at restaurants and theatres.

But if Goldman’s parsing of the data is correct and this slowdown in demand presages lower consumption for a longer period than expected, then the ramifications could be wider. 

Goldman estimates that everyday services spending is around 15 per cent of total consumption. So if that is indeed running significantly below its 2018 level then other sectors that have bounced after the pandemic will not be able to fully compensate.

And, says the bank, it “strongly suggests that consumption may not return to pre-pandemic levels” even long after the Covid era. That in turn could make the already difficult monetary policy decision for the Bank of Japan even more complicated.

Stefan Angrick, senior economist at Moody’s Analytics, says the BoJ is trying to talk down the yen because it does not want to hike rates until the domestic economy is in full health. This will be “a very difficult line to walk”, Angrick says.

And even if the current regime of cheap money has obvious advantages, many chief executives think higher interest rates are a price worth paying if it means a thriving economy.

“I think there’ll be a lot more benefits and merit and that comes from a better economy, which will more than offset the rising cost of our debt. So I really hope that the economy will get to that point that the BoJ will raise interest rates,” said Atsushi Katsuki, CEO of beer group Asahi.

david.keohane@ft.com

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