July 29, 13:00 JST, 2016

Japanese economy had a buoyant month in June

Judging from all the data that was released on early morning of July 29, the Japanese economy had a good month in June. Unemployment rate fell to 3.1%, reaching the lowest rate since 1995. Most surprisingly, manufacturing activities in Japan seem to be on a buoyant trajectory. Industrial production expanded by 1.9% month on month and manufacturers plan to expand the production further by 2.4% in July and by 2.3% in August. The yen appreciation so far in 2016 seems not to have affected their production plans.

Unemployment rate is now the lowest in 21 years

Manufacturing activity does not seem much troubled by the yen appreciation

Retail sales in June did disappoint by declining 1.4% year on year, but most of the decline are in fuels, caused by decline in oil prices.  Japanese private consumption is stagnant, but not plummeting. Remember, Japan’s population is shrinking, so stagnant sales are normal.

In June 2016, retail sales declined from a year ago for the fourth consecutive month

What about the inflation? Yes, well, the consumer price is falling. National CPI excluding fresh food fell by 0.5% year on year. Even excluding energy and food, the consumer price in Japan is dis-inflating, from a rise of 0.6% in May to 0.4% in June, opposite to what the BoJ is aiming to achieve.

While we agree that reflation is a top priority for Japan, we no longer think the BoJ should add more stimulus. After three years of QQE, the cost of monetary easing has increased. In our view, the cost of additional easing, in terms of increasing risks to the balance sheet of Japan’s central bank, now exceeds to benefit of additional easing. The decision to expand the equity ETF purchase to 6 trilllion yen is a good example. It will imperil the sustainability of Japan's monetary policy. The calculation may change if Japan is to face more imminent and explicit downside risk, but it would be produnt for the BoJ to preserve extreme measures for extreme circumstances.