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MNI POLICY: BOJ Concern Over Break In Income/Spending Cycle

(MNI) LONDON
TOKYO (MNI)

The Bank of Japan continues to eye the weakening labour market, seeing a growing risk that the virtuous cycle of income to spending as a driver of the economy could stall, MNI understands.

If the cycle weakens, the economy will lose momentum, increasing concerns that the output gap will worsen, impeding a recovery of the inflation rate towards Japan's 2% target.

Such a situation could prompt the BOJ into additional easing measures once Japan is finally past the Covid-19 pandemic and on the road to recovery, For now, the central bank is concentrating on providing liquidity and financing for firms to see them over the crisis.

In the corporate sector, lower profits are holding back capex spending, although firms are positive on focused capex for research and development, taking advantage of the BOJ's lending facilities.

The BOJ on Wednesday downgraded its assessment on capex, seeing it on "a declining trend."

WEAK BASE WAGES

With corporate profits falling as the virus hits home, many businesses reduced their summer bonuses and will further cut winter bonus payments as well.

Regular workers' base wages, the key to a steady recovery in cash earnings, fell 0.5% y/y in July for the second straight drop following -0.2% in June, the first drop in 74 months.

The data showed that businesses are negative about higher wages, although at present many firms are refraining from cutting regular workers.

SERVICE SECTOR IMPACT

Across Japan, non-manufacturers account for about 80% of overall businesses, of which 50% is the service sector.

The service sector has been hardest hit by the virus to date – and is unlikely to recover to far in the immediate future, and is not seen returning to pre-coronavirus levels for a while as people's living style has changed.

Private spending rebounded in June due to a combination of pent-up demand and the government's cash distribution, but spending fell in July and August.

MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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