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.
With respect to activity, the BOJ Tankan sends a somewhat mixed message, with sentiment stable, and capex quite strong. On inflation the survey corroborates the message of other leading indicators, suggesting that the acceleration in CPI is losing some momentum.
The negative link between consumer confidence and inflation is probably the clearest example of JPY weakness being bad for the economy. However, before this affects the BOJ, the bank will likely want confirmation that this link can't be broken by the stalled restart of services activity after covid.
Today's trimmed mean measure of CPI is broadly consistent with the BOJ's assessment that inflation in Japan still lacks broad-based momentum.
The acceleration in inflation of the last few months stalled in May, with both core and headline unchanged. The leading indicators aren't yet suggesting a re-acceleration, with a softening of commodity prices offsetting the weakness of the JPY.
As with other inflation indicators, May service PPI shows price pressures running at multiyear highs. But the pick-up of the last couple of months is narrow, concentrated in international transport costs, which in turn related to the rise in energy prices.
The BOJ is under pressure, but Japan isn't in crisis. Rising energy prices hurt, but ending YCC would be painful too. Instead, it is probably better to focus on economic normalisation post-covid. That would likely include an influx of tourists concluding that, with the JPY at 135, Japan is cheap.
The BSI survey suggests that the economy remains on a recovery path. There aren't signs of a big acceleration in growth, but nor are there indications that the headwinds in the world economy and depreciation of the JPY are causing Japanese firms to turn pessimistic.
The BOJ didn't move today, and while the central bank is facing strong market pressure to move, so far at least, there's not so much domestic political pressure.
Exports in volume terms remain elevated compared with history. But JPY weakness means a lot of variation in export values, and also a rapid rise in the import bill.
Machine orders in April were surprisingly strong, and suggest some resilience in both exports and domestic capex.
Despite all the headwinds, the outlook for the economy looks quite solid, with RGDP likely to be growing 2-3% YoY in the next few months.
Profits declined in Q1 as input prices rose. Non-manufacturing margins, however, remain fairly high, and overall capex growth in Q1 was stable at 3% YoY.
Consumer sentiment remains very weak. However, a turn up is starting to take shape, and that could gain real momentum if the April-May moderation in inflation expectations continues, and a further relaxation of covid restrictions encourages a more vigorous recovery in services activity.
The labour market data in April were positive, albeit more in the sense that the labour market is growing rather than necessarily tightening. That's good for aggregate earnings, but means a rise in individual pay might still be some way away.
There's probably a bit more upside in CPI from here, but data for Tokyo in May fit with the idea that inflation momentum is starting to ease.
Headline services PPI accelerated sharply in April to 1.6% YoY, then highest since at least the 1990s. But that was mainly due to the surging cost of international freight services. Domestic services inflation is rising, but more modestly.
Trimmed mean CPI rose again in April to a record high, and there's probably still a bit more upside ahead. But for CPI to take another meaningful step higher, the domestic labour market likely needs to tighten further.
CPI rose in April, with the BOJ's preferred measure rising above 2% YoY for the first time in Governor Kuroda's tenure at the BOJ. The leads now suggest a peaking, which if right, would likely be positive for domestic economic momentum.
Headline YoY export data in April were reasonably firm. But exports fell quite sharply MoM. Downside risk for the regional export cycle is increasing.
