Retail sales are becoming quite robust in Japan. In the 6 months to October, retail sales expanded by 4.4%, a remarkable growth for Japan. The inbound tourism consumption is likely to have given a large boost. Japan Tourism Agency estimates that the inbound tourism consumption in the July-September quarter reached 1 trillion yen threshold, almost doubling from a year ago. Japanese households must also be loosening their purse. Fundamentals are in fact encouraging for Japanese consumers. While the wage growth remain subdued, employment opportunities seem plentiful. The sizable decline in energy prices are also enabling consumers to spend the money elsewhere. In our view, the retail activity in Japan can remain on the roll until April 2017 when sales tax is scheduled to rise. Read more..
So it is official. Japan had a technical recession in 2015. However, we would emphasize the word technical. With the rapidly shrinking working population, the potential growth rate of Japan is very close to zero. Having zero or moderately negative growth is no longer a big deal for Japan. In the last 5 years, Japan had three separate recessions. The likely responses from the Japanese policy makers reflect such business as usual nature of the recession. The Abe cabinet will likely compile a supplementary budget, but it will be half-hearted, with the aim mostly to win sympathies for the ruling party ahead of the Upper House election next summer, rather than boosting the economic growth. Similarly, the BoJ is unlikely to concede its position that Japan is still on its way to reflation. While we are not pessimistic on the near term growth outlook, we certainly do not think that Japanese is any closer to achieving a sustainable growth. Read more..
There is a sign the inflation expectation among Japanese households is waning off. In October, inflation expectation DI fell to the lowest level since April 2013, the month the BoJ initiated its current QE. While this development is a blow to the BoJ theory that inflation expectation is becoming firm in Japan, We think the BoJ will nevertheless maintain its hawkish stance. Japanese consumers have an adaptive expectation on inflation and the decline was probably inevitable as the sharply lower energy prices cause the inflation to fall. The household inflation expectation could be a factor in the wage determination process, but empirical papers on the issue tend to find that the labor market conditions, rather than the inflation, have dominant influence on the wage determination in Japan. Read more..
BoJ kept its policy unchanged as it concluded its two days policy meeting on October 30. While their inaction was in line with our expectation, the fact that so many economists misread its intention shows that the BoJ has a serious communication problem with the market. We also think that by choosing to keep its policy unchanged and hoping for an inflation to materialize, the BoJ is returning to its traditional passivism and making the Japanese economy vulnerable to a downside risk. Read more..
The BoJ kept its policy unchanged on October 7. Listening to the press conference given by the governor Kuroda, it seems unlikely that the BoJ would decide to ease before the end of the year. Mr Kuroda continues to believe that there is an ongoing reflationary trend present in Japan. While he admits the recent weakness in the industrial production, he attributes it to factors outside Japan and downplays its significance by stating that the manufacturing industry nowadays accounts for only 20% of the economy. Moreover, he seems emboldened by the robust corporate profits and the apparent willingness of corporate managers to invest in Japan revealed in September BoJ Tankan. His optimism seems genuine and we do not think he will change his assessment unless some unforeseen and significant negative shocks shake his confidence. Read more..