March 27, 2015, 21:00 JST

A lukewarm spring time in Japan

The batch of Japanese data released in the morning of March 27 initially looked pretty cold. The February retail sales looked plain awful, declining by 1.8% year on year. The unemployment rate did improve to 3.5%, but not yet returning to the recent low of 3.4% reached in December 2014. Another shocking figure out this morning was the new job offers to applicant ratio that fell sharply from 1.77 in January to 1.63 in February. Overall, for those economists hoping to see data that validate a positive view on Japan, including us and probably the BoJ, the data looked awful.

Source: METI, JMA

On a closer inspection though, we did find some data that made the data look less awful. On the retail sales, we found that it was mostly the sharp decline in the sales of fuel that hurt the overall retail sales. Fuel sales fell by 17.8% in February, dragging down the overall retail sales by as much as 1.6% points. Meanwhile we found that department store sales did well in February. At 2.9% year on year, it was the highest growth after the sales tax hike in April 2014.

 Source: METI, JMA

For the explanation of the robust department store sales in February, we suspect that the huge inflow of overseas tourists, up almost 60% year in year and reaching the single month high of 1.4 million in February has something to do with it. Overall, retail sales does seem without a strength, but not deteriorating.

 Source: JNTO, JMA

As for the sharp deterioration in the new job offers to applicant ratio, we did not find any economic reason for the sharp decline. The decline in the ratio was caused by a sudden increase in job seekers in February, up 4.8% from the previous month. However, according to the unemployment rate statistics, it shows that the number of unemployed should have shrunk in February by 2.1%. Probably a statistical glitch? We hope the March data would give us better clue on what's actually happening in the labor market.

 Source: MHLW, JMA

Overall, the batch of data was not as cold as it initially looked, so, let's say it was lukewarm. 

What about the CPI, you may ask. Well, what about it? Energy prices are continuing to fall, what more can we say. Is it a bad news? Should the BoJ think about easing? No. There is no need for the BoJ to ease. We have covered this ground too often recently and we do not want to bore you again, but let's try to put our view succinctly. Falling energy prices is a fantastic news for Japan, it should boost the economic activity and it won't be wrong to say that the falling energy prices are inflationary for Japan in the medium term. To us, it is almost illogical to call for the BoJ to ease because of the falling energy prices. It is true that the BoJ governor Kuroda cited the falling oil price as an important reason for the additional easing he implemented on Ocober 31. But the market should know that the real reason the BoJ eased was to counter the negative effects from the sales tax hike Japan implemented in April 2014. Mr Kuroda just could not say so as it would have been politically incorrect to put a negative spin on the sales tax hike. 

In order to measure the medium term trend in the inflation, one indicator we monitor is a trimmed CPI inflation series. It basically cuts out the volatile part of prices changes, in order to have a better understanding on what is happening at the real "core" of the CPI inflation. According to this measure, the "true" core of the CPI inflation is not declining. See the chart below.

 Source: MIAC, JMA

Overall, February data were rather disappointing, but not so bad as to make us consider changing our view. We continue to look for the wage inflation to gradually accelerate in the coming months and economic activity in Japan to strengthen, fueled by private capital investments and a recovery in private consumption. The Tankan survey due to be published on April 1 should be an interesting data to watch as includes a survey for corporate capital expenditure plan for FY2015. 

 Source: MoF,BoJ, JMA