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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. However, taking a step back reveals a different perspective — and for those anticipating the Bank of Japan to finally end its era of loose monetary policy, it becomes potentially more intriguing.
Goldman Sachs’ recent research highlights that Japan’s strong post-Covid recovery in consumption has “slowed considerably so far in 2023,” still remaining 4% below pre-pandemic levels.
The issue is partly attributed to the impact of long-awaited higher inflation, which has resulted in real incomes decreasing by 3 to 4% since 2022. However, the more crucial matter may lie in the changes to people’s lifestyles and work habits brought about by the pandemic, according to Goldman Sachs’ senior Japan economist, Tomohiro Ota.
By this, he means the types of establishments such as fitness clubs, pachinko parlours, after-work restaurants, and bars that continue to experience “stagnant” consumption, still below 2018 levels on average this year.
Pubs and izakayas have witnessed a 39% decline in spending during the first half of the year compared to 2018, even as lockdown-friendly activities remain buoyant and other struggling sectors, like travel, bounce back.
“The changes in 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.”
Companies, including those in the beer business, are closely monitoring the data. They have not seen a recovery in sales, while food groups struggle due to weak consumption hindering price increases. Retailers Lawson and Aeon have started reducing prices on certain products, raising concerns about the sustainability of recent price and wage increases.
Although entrenched working-from-home practices may not be the sole reason for the slump, Ota believes that the way Japanese people socialize may have fundamentally changed since the pandemic. This is evident from the 50% decrease in reservations for group business meals this year, and the decline in restaurant traffic extending to weekends and holidays.
Initially, the primary effects of these changes may seem unremarkable, with restaurants failing at higher rates compared to other businesses. Moreover, a shift in demand is not necessarily negative for the overall economy if people choose to spend their money at home on takeaways and Netflix, rather than in restaurants and theaters.
However, if Goldman’s analysis of the data is accurate and this demand slowdown hints at a longer period of reduced consumption, the implications could be far-reaching. Everyday services spending, estimated at around 15% of total consumption, may remain significantly below 2018 levels, preventing other sectors that have recovered post-pandemic from fully compensating for the shortfall.
According to the bank, this “strongly suggests that consumption may not return to pre-pandemic levels,” even in the long run. Consequently, this could complicate the already challenging monetary policy decision for the Bank of Japan.
Moody’s Analytics senior economist, Stefan Angrick, states that the BoJ is attempting to suppress the yen’s value as it does not want to raise interest rates until the domestic economy fully recovers. However, Angrick acknowledges that this will be a difficult balancing act.
Although the current era of low interest rates has its advantages, many CEOs believe that higher rates are justifiable if they contribute to a thriving economy.
“I think there’ll be a lot more benefits and merit 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 the point that the BoJ will raise interest rates,” said Atsushi Katsuki, CEO of beer group Asahi.
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