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.
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.
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.
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.
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.
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.
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.
