Paid Members Public Japan – inflation up again Tokyo CPI rose again in January, and on a headline basis is now above 4%. Leading indicators continue to suggest the peak should be close, with this week's services PPI for December falling. Paid Members Public The East Asia Economist With US rates peaking and Asia finally opening up after covid, Japan's economy looks better placed for recovery. If the BOJ tightens now, it risks a policy mistake. Otherwise, the indicators to be watching are the shunto, and recovery of the hospitality industry as Asian travel finally normalises. Paid Members Public Japan – not much change Inflation trends aren't changing much. Current inflation through December was high, but leading indicators point to a clear peak. Regardless, policy uncertainty will remain high at lest until the PM picks a new governor for the central bank, an annoucement that is likely in the next few weeks. Paid Members Public Japan – inflation back to 2% Import price inflation eased in December, suggesting CPI inflation falls below 2% YoY in 1H23. On this basis, the BOJ shouldn't be tightening. But having opened the door to change in December, the bank faces an enormous task if it wants to convince the market that rates aren't moving further. Paid Members Public Japan – sluggish recovery The EW survey of corporates and households continues to suggest modest recovery. It can be hoped that household sentiment improves from here as inflation comes down. That will be helped by the stronger JPY, though data released yesterday confirm very large JGB purchasing by the BOJ in December. Paid Members Public Japan – steady consumption growth There's volatility from month-to-month, but the BOJ's measures show that broadly, the acceleration in consumption growth seen since late 2021 is holding. That's even though the BOJ's consumer confidence survey shows a high level of pessimism, with particular dissatisfaction about prices. Paid Members Public Japan – 3.5% core services CPI Tokyo CPI accelerated again in December, with further evidence of a broadening in price pressures away from just imports and goods. Underlying services inflation looks to be running at around 3.5% YoY, and with the economy continuing to open up after covid, a further increase is likely from here. Paid Members Public Japan – (still) warming up Japan's labour market is continuing to warm up, but to create sustainable wage and price it needs to run hot. Such a transition is possible, but it likely needs a stepping up of employment in the hospitality industry. Paid Members Public Japan – waiting for hospitality The Tankan points to GDP growth remaining tepid. It does, however, confirm other data showing services price inflation is beginning to emerge. That seems likely to at least persist as Asia opens up after covid, challenging BOJ claims that inflation in Japan is all about energy prices. Paid Members Public Japan – still sluggish Japan's cycle remains sluggish, partly because of import price inflation, though that receded in November. In theory, post-covid opening up of the economy should add momentum to the modest wage and service price inflation being seen. But that feels optimistic given softening business sentiment. Paid Members Public Japan – incrementally stronger wages Modest wage growth is gradually accelerating. Labour market dynamics are consistent with that continuing. There is upside risk, but that remains the same as it has been the last few months: normalisation of the economy after covid. Paid Members Public Japan – some help from autos Japan's exports are being helped by some normalisation of auto sales. But our regional leading indicator continues to point firmly down. Paid Members Public Japan - sluggish In Q3, the economy contracted. Leading indicators suggests that this is noise, and that a mild rate of growth should resume. But corporate sentiment remains unstable, and consumers continue to feel the pressure of rising prices. Paid Members Public Japan – inflation overhang Underlying dynamics in both the labour market and consumption suggest the economy remains on a recovery path. But the positive impact of these trends continues to be offset by inflation. Paid Members Public cycle Japan – warm, not hot Japan's economy is warm, not hot. That will change if the positive consequences of JPY weakness (corporate competitiveness) start to outweigh the negative (lower real incomes). At that point, some of the nonlinear upwards pressures on prices identified by the BOJ will start to become important. Paid Members Public Japan – inflation higher, domestic activity recovering The EW survey suggests the economy is growing, but slowly. Inflation is rising, dampening consumer sentiment, and manufacturing sentiment has weakened, but there's some offset from post-covid normalisation. This picture suggests the BOJ can for now continue to tolerate the weakening of the JPY. Paid Members Public Japan - warming up, gradually The Tankan suggests that growth should be just about strong enough to produce a further closing of the output gap. In this sense, while they aren't particularly solid, some of the foundations are falling into place for a broadening of inflation away from just import costs and goods prices. Paid Members Public Japan – tentative consumer turn Neither consumer confidence nor the labour market were as strong as the previous month. But it does still look like the labour market is starting to tighten, which in turn should help firm up the tentative bottoming out of consumer confidence. Paid Members Public Japan – CPI rising, BOJ on hold BOJ trimmed mean inflation continues to rise, but the BOJ is keeping policy unchanged. With rates remaining anchored, the JPY continues to sell off. The MOF has been talking about "stealth intervention", but it is unclear if that includes pressure on the GPIF to unwind some of its foreign holdings. Paid Members Public Japan - inflation still rising Inflation rose again in August, and there should be further upside before the end of the year. Headline CPI should be easing in 2023, but whether core does too depends on inflation expectations, the labour market, and the transition from goods to services prices. Paid Members Public Japan - August foreign trade Exports continue to go sideways, which at a headline level is because weaker tech shipments are being offset by stronger car sales. Imports in JPY terms are still rising, so the trade deficit continues to widen. Paid Members Public Japan – PPI, business sentiment Upstream goods price inflation softened in August, pointing to a peaking of CPI in the next few months. One risk to that would be a pick-up in services price inflation, but today's quarterly business survey from the MOF suggests the cycle isn't yet strong enough to produce such an outcome. Paid Members Public Japan – August Economy Watchers survey The Economy Watchers survey rebounded in August, and is at a level consistent with mild GDP growth. But the survey isn't strong or stable enough to suggest an acceleration in the sluggish pace of the post-pandemic recovery. Paid Members Public Japan – July wages The wage data don't change the macro picture. Wages are creeping up, but are rising less quickly than inflation. The labour market isn't yet tight enough for nominal wages to accelerate much more. Paid Members Public Japan – consumer confidence Consumer confidence is the second sign of some change in the economy following the July labour market data. These shifts aren't nearly enough to conclude that finally, there is post-pandemic normalisation of the services economy. But that is something to be watching for.