East Asia Econ

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.

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.

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.

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.

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.

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.

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.

While headline coincident indicators were unchanged in July, a jump in the new offers:applicants ratio suggests the sluggish post-pandemic recovery might finally be taking a new step up.

Different measures of inflation announced in the last few days show short-term inflation pressure remaining strong. Leading indicators suggest a peak in the next 6M, but that could be wrong if JPY commodity prices take another leg up, or services price inflation in Japan starts to appear.

Inflation rose again last month, and further rises are likely. The steep coincident increase in inflation expectations raises the risk that the rise in CPI could be sustained, but that would seem more likely if services prices were also increasing more quickly, and the labour market tightening.

Q2 GDP shows economic recovery remains slow and uneven, with downside risks in early Q3. Capex is rising, but really only in nominal terms. Exports are going sideways, though there might be some upside risk from autos. Relatively high inflation will likely peak soon. The monetary base is shrinking.

The Economy Watchers survey fell again in July, suggesting no change in the slow pace of economic recovery out of the Covid-19 pandemic.

Labour market data continue to be solid, but not so tight as to suggest a build-up of domestically generated inflation.

The negative correlation between inflation expectations and consumer confidence continues to hold. So, with inflation expectations rising, consumer confidence is falling quickly.

Various releases this week show that inflation is still rising and broadening, and that there's likely more to come. However, price pressures do continue to be driven more by global than domestic factors.

June CPI was still quite strong. But there aren't signs of a transition from goods to services price inflation. Without that shift occurring, the BOJ has justification for arguing that inflation isn't broad-based, and thus that policy doesn't need to change.

Exports in volume terms are going sideways, but surging in JPY terms. The JPY value of imports is rising even more quickly, causing further deterioration in the trade surplus.

After a bit of a pause earlier in the quarter, import price inflation accelerated again in June, signalling a further rise in CPI.

Machine orders softened in May, but not by enough to outweigh the improvement of the previous two months.

The labour market is tightening. But while wage growth is accelerating, the pick-up is modest, and doesn't look sufficient to create a lot of upwards pressure on prices.

The BOJ's consumer survey provides granularity on the negative impact on spending of rising prices. However, the survey also shows overall confidence being mixed rather than outright negative, with two offsets being a tight labour market and rising incomes.

The fall in manufacturing sentiment is concerning, and there's clearly concern about input prices. But commentary in the survey overall didn't seem particularly negative, including further signs of a normalisation of consumer behaviour after covid.

Despite all the JGB buying in June, Japan's monetary base actually contracted in the month. That was because of the winding down of the Covid-19 lending programme, and shows monetary expansion isn't as wild as headline data alone would suggest.

The sharp acceleration in CPI inflation of the last couple of months faded in June in Tokyo. Without a new driver emerging, it seems likely that national inflation is close to peaking, though JPY weakness will likely prevent inflation from falling too far.

The labour market is fairly tight, and the gap between demand and supply is continuing to narrow. But the pace of tightening is gradual, and doesn't seem likely to create a lot of wage inflation any time soon.