BoJ surprised the market again by standing still. The majority of street economists predicted an easing today. Their reasons vary, but we see one common theme. It is often argued that the BoJ needs to take actions to show its commitment to the inflation target while it admits a postponement of when it plans to achieve it. However, as we pointed out in a short comment back in September 2015, the BoJ seems no longer bound by time limits. The prediction as to when 2% inflation target would be achieved is a mere prediction, perhaps more of a wishful prediction, and definitely not a binding commitment. Read more..
Japanese exports had a moderate expansion in March. The export volume index rose by 1.9% month on month, mainly driven by the robust exports to EU. However, exports to US and to China, the mainstay of Japan's export, remained stagnant. With yen on an appreciation course, the path to growth and reflation seemed to have closed off for Japan Read more..
Japanese policy makers have maintained in the last 3 years that we should be seeing a persistent wage growth acceleration. We had some sympathy with the notion in the past, but we no longer think that we would be seeing further wage acceleration in Japan. The Japanese economy stopped expanding in the past 12 months and corporate profits are already shrinking. A few indicators suggest that the labor market is starting to cool. In our view, Japan is already derailed from the trickle down path to a reflation and a negative shock could bring Japan back to the vicious cycle of an economic stagnation and deflation. Read more..
March BoJ Tankan revealed that Japanese companies are starting to revert to deflationary mindsets. For fiscal year 2016, they expect their sales and profits to decline and their capital expenditure to shrink. Japan seems to be heading back toward deflation. Unfortunately, policy makers are yet to realize the depth of the problem. They are talking about a fiscal stimulus, but they seem to regard it merely as a convenient excuse to promise rewards to their supporters ahead of the Upper House election. In our view, policy actions will probably come too late and too little to save Japan from its descent to deflation. Read more..
Core machinery orders, the leading indicator for the private capital expenditure in Japan, expanded by 15% in January, boosting the monthly orders to the pre-Lehman shock level. However, the strength is most likely one-off. A closer inspection of the data reveals that the boost in January came entirely from the steel industry, an industry supposed to be suffering from over capacity. Despite the superficially strong machinery orders, we think it is more likely that the capital expenditure is peaking off in 2016. Read more..