The platform for tracking and understanding East Asia macro
The gap between import prices and PPI in the October data illustrates the sort of pent-up inflationary pressure in Japan that is likely to be exposed if the JPY remains so weak. Today's data also show a decent rise in auto export prices, but to a level that is still 6% below the pre-tariff level.
The sharp recovery in sentiment in the EW survey continued in October. The improvement is broad-based, affecting both corporates and households. That shows a lessening of the tariff and inflation shocks of 1H25, and should be reflected in the BOJ becoming more optimistic about the outlook.
The summary of the October BOJ meeting show a stronger consensus that the time is approaching for another rate hike. That is partly because concern about tariffs is fading. It is less about domestic demand: data today show consumption trending up, but still only very slowly.
Wage growth was softer in September. The continued slowdown in part-time wages per hour will be a bigger concern if it persists beyond the October rise in the minimum wage. Per hour full-time wage growth is stronger than the headline, though the data are noisy.
Today there were the usual month-end data releases of retail sales, the labour market, and construction, as well as Tokyo October CPI. More interesting was the BOJ's full outlook report, analysing exports, capex resilience, food prices and consumption, as well as wages and prices.
The steady drop in services PPI inflation stabilised in September, with core ticking up to 2.9% YoY. The data aren't good enough to prove the decline is now over, but I do think a floor should be close. Lumpiness in the data suggests a short-term bounce, and the labour market remains tight.
National inflation data for September was messy again. One reason was public service prices falling, a development that stands out when a theme of recent BOJ speeches has been pent-up inflation pressure in the public sector. Overall, the inflation picture still looks solid.
BOJ board member Takata Hajime yesterday likened the downwards revisions to the BOJ's forecasts on the back of tariffs to a typhoon-linked "planned suspension" of public transport that now needs to be lifted. He also argued inflationary pressure is increasingly being driven by domestic factors.
Naoki Tamura's speeches are always clear and interesting. Some of his remarks today overlap with points I've highlighted the last few months: the strength of the Tankan survey and sakura report; repressed inflation in public services prices; the negative impact of inflation on pensioners.
In September, even before the renewed JPY depreciation of the last week, PPI inflation rose. By raising import prices, USDJPY back above 150 will mean input price inflation remains stronger for longer. The (relative) hawks at the BOJ will be becoming more convinced that inflation is sustainable.
With JPY depreciation unpopular and the cycle intact, it is unlikely that the Takaichi administration can really make the BOJ hike even more slowly than it has been. The policy that would work better for defusing the cost of living crisis would be fiscal loosening to raise household incomes.
One of the data points that challenges the BOJ's confidence on wage-price developments is slowing part-time wage growth. That ticked up in August, as did base pay for full-time workers. By historical standards, both are high, but growth in overall earnings growth continues to trail price inflation.
The main takeaway from Governor Ueda's speech today was that he remains concerned about the impact of tariffs. That isn't unreasonable, and more than today's rise in UE, is a reason to think rate hikes aren't a done deal. However, I still think the Tankan has pushed the BOJ further in that direction
Inflation indicators in yesterday's summary release of the Tankan were already firm. Today's comprehensive release paints a picture that is stronger still. The implication is that one of the BOJ's older measures of underlying inflation, the trimmed mean, is likely to remain above 2% for the next 6M.
Tomorrow's comprehensive release will add more details, but today's summary Tankan looks solid, for overall sentiment, the labour market, and inflation. For BOJ doves looking for reasons not to hike further, the Tankan doesn't supply them.
Inflation measures have become more mixed in recent weeks. But the drop in core measures of CPI inflation in the capital in September don't add to downside risks, being more the function of government subsidies. In other news, exports were firm in the first ten days of September.
Minutes of the July MPC meeting show a long but rather inconclusive discussion of the concept of "underlying" inflation. Recent data don't bring clarity: services PPI inflation has slowed, but not in labour-intensive industries, while the rice price has rebounded further.
My latest video, discussing the important question posed in a report of a few weeks ago. Japan's population peaked in 2010, and aggregate consumption stopped growing shortly after. With the number of people continuing to shrink, can consumption – and thus the broader economy – ever grow again?
While the BOJ remained on hold today, the two dissenting votes to hike are important signals in the direction of travel. The context is inflation that remains firm, with today's August national CPI data showing some signs of underlying inflation starting to creep higher again.
Manufacturing sentiment in the EW (Aug) and Reuters Tankan (Sep) surveys is back above the long-term average. Export volumes have softened the last couple of months, but are still above end-2024 levels. This is probably a lesser impact from tariffs than the BOJ had expected.
Headline full-timer wages data were strong in July. But the details of the overall wage release were softer, and warn of some lessening of labour market tightness. In other data today, consumption was soft in July, and exports in the first 20 days of August also weakened.
The content of deputy governor Himino's speech today was thoughtful and so interesting, covering both tariffs and the outlook for prices. But consistent with the ponderous tone, the conclusions weren't particularly forceful.
The Q2 rise in the labour share promises support for consumption, but without yet depressing profits. Manufacturing earnings did drop in Q2, and that questions the sustainability of capex. But IT investment was also strong, and the PMI suggests that overall, manufacturing is coping with tariffs.
The fall in the UE rate in July to 2.3% isn't substantively important. The mechanics behind it were more noteworthy, in particular a ticking down in the part rate. Other data today show a softening of inflation in Tokyo in August, and nationwide retail sales falling to the lowest level in 2 years.
The BOJ's inflation outlook is based on two dynamics: a waning of imported price inflation, but firmness in wages and inflation expectations. Services PPI is consistent with that framework. Headline is softening, but in sectors with high labour-intensity, it remains solid.