【MACRO Alert】Japan's economy faces multiple challenges, with data revisions, monetary policy, and the issuance of new banknotes following one after another!

The Cabinet Office of Japan recently updated the economic growth data for the first quarter, showing that the contraction was more severe than previously announced. The originally expected annualized decline of 1.8% was revised to 2.9%, reflecting the fragility of Japan's economic recovery. The actual decrease in GDP was also adjusted from 0.5% to 0.7%, indicating that the economy has shrunk again after a brief period of growth. This revision of the data is a rare adjustment by the Japanese government on economic statistics.

The Ministry of Land, Infrastructure, Transport and Tourism of Japan found that a construction company had falsely reported the number of orders, which affected the data on public investment and private residential investment. Public investment, which was originally reported to have increased by 3%, was revised to a decrease of 1.9%, and the decrease in private residential investment was also adjusted from 2.5% to 2.9%. In addition, the annualized GDP growth rate for the fourth quarter of last year was revised down from 0.4% to 0.1%, and the GDP data for the third quarter was revised from a decrease of 3.7% to a decrease of 4%. Kyodo News pointed out that although it avoided a contraction for three consecutive quarters, inflation and safety issues of car manufacturers led to a decrease in consumer spending, and the economy still faces pressure.

The downward revision of economic data led to a decline in the yen's exchange rate, with the yen-to-US dollar exchange rate hitting the lowest record since December 1986. Analysts predict that the Bank of Japan may lower its economic growth expectations in the upcoming new quarterly forecast, which may affect its interest rate hike timing. The Bank of Japan raised the policy interest rate in March and ended the yield curve control policy, while promising to continue to maintain a loose monetary environment by purchasing government bonds. At the monetary policy meeting in June, the Bank of Japan decided to keep the policy interest rate target unchanged and plans to reduce the purchase of government bonds, which may further weaken the yen.

Japan's economy is facing multiple challenges, including downward revisions of economic data, the decline in the yen's exchange rate, and adjustments in the central bank's monetary policy. These factors could significantly impact Japan's economic outlook. At the same time, Japan has introduced a new design of banknotes for the first time since 2004, which may have a slight positive impact on the economy. The issuance of new banknotes could encourage some cash holders to shift funds from savings to investment, rather than simply keeping them in reserve.

The new banknotes, valued at 10,000 yen, feature the portrait of Eiichi Shibusawa, who is hailed as the father of Japanese capitalism. Although this move seems to contradict the increasingly popular trend of cashless payments, officials from the Bank of Japan and the Ministry of Finance have emphasized the ongoing importance of banknotes. Bank of Japan Governor Haruhiko Kuroda noted that cash will continue to play its role as a safe means of payment. According to data from the Ministry of Economy, cashless transactions in Japan are gradually increasing and are expected to account for 39% of all transactions by 2023, although still lagging behind some other countries.

Takashi Kinoshita from the Nomura Research Institute estimates that the issuance of new banknotes will have an impact of over 1.5 trillion yen on the economy and could boost GDP growth by about 0.25 percentage points. The introduction of new banknotes will require the updating of various systems, which could put pressure on some small businesses, especially those without government subsidies. Despite this, it is expected that most electronic cash registers and ticket machines at stations will be compatible with the new banknotes. Some analysts even believe that the issuance of new banknotes could change the behavior of cash savers.

Due to long-term deflation and low interest rates, Japanese households have a tendency to store a significant amount of savings in cash. Hideo Kumano from the Dai-ichi Life Research Institute points out that households hold cash savings of up to 600 trillion yen. The issuance of new banknotes may encourage people to use these savings for investment to cope with the current inflation. Eiji Kinouchi from Yamaichi Securities believes that the issuance of new banknotes could trigger an increase in investment, bank deposits, or consumer spending, with the key being whether the real interest rate will remain at a low level. However, economists are cautious about the future of the Japanese economy.

After a significant downward revision of the first quarter GDP data, some economists predict that the Japanese economy will contract in 2024. Economists from BNP Paribas and SMBC Nikko Securities have downgraded their economic growth forecasts, expecting a contraction in GDP for 2024. In addition, when considering interest rate hikes, the Bank of Japan also needs to weigh the risks of rising inflation, as the yen continues to decline, setting a new low in 38 years this week.

The Japanese economy is currently facing the challenge of slowing growth, with the first quarter GDP data being downwardly revised to an annualized contraction of 2.9%, while the yen's exchange rate has hit a new low. Although the central bank adjusted the policy interest rate in March and plans to reduce the purchase of government bonds, the economic outlook remains uncertain. Furthermore, officials from the Bank of Japan and the Ministry of Finance have emphasized the importance of cash and introduced a newly designed 10,000 yen banknote, aiming to encourage investment and consumption while dealing with inflation. However, economists express concern about the economic contraction in 2024, and the central bank needs to consider the inflation risks when making decisions on interest rate hikes.