East Asia Econ

There's nothing in the Q2 Tankan to change the BOJ's view of the economy, with sentiment stable, the labour market tight, and inflation elevated. Separately, consumer confidence in June ticked up.

Today's data releases show stronger Tokyo inflation, headline and core; no big change in the labour market; and a rise in IP.

April SPPI was revised down, but the SAAR through May remains around 4%. With wage growth up, the BOJ's new measures of SPPI by labour content suggest inflation remains well-supported.

Catching up on wages, inflation, activity and the BOJ. Overall, growth is weaker, and inflation stronger, trends that are likely to intensify after the bank's lack of action earlier this month.

Of course, headline data matter. But not as much in Japan as elsewhere. Official data don't suggest a tightening economy, but in the last 6M, the BOJ has nonetheless become more confident that Japan is heading to sustainable inflation. We'd expect more rate hikes soon.

Wage growth in Japan is solid, and the macro backdrop, such as today's services PMI, indicates is probably accelerating. However, the pick-up isn't showing up in all the data.

Data this week show a return to JPY-driven inflation that erodes consumer incomes and spending. But shifts in BOJ language suggest a central bank that is less doveish, a shift that should start to matter for the currency.

We have a look at services price momentum and the BOJ view, with April services CPI, services PPI, and deputy governor Uchida's speech yesterday, remarks that he concluded by saying: "this time is different"!

The April national CPI data only have incomplete hints of the transition the BOJ expects to domestically driven inflation. The more obvious trends for now remain renewed JPY weakness and labour market tightness.

GDP contracted again in Q1. The big driver remains the weakness of consumption, dragged down by the weak JPY and inflation eating into real incomes. Partly as a result, it seems to us that the BOJ is signalling it will raise rates more than the market currently thinks.

It feels to us that, with so much of the market's focus being on $JPY and the MOF, not enough attention has been paid to the increasing confidence being expressed by the BOJ.

Part-time wage growth is now finally reflecting the labour market tightness seen in survey data, and so supports the BOJ's confidence in the macro cycle.

The boxes in the BOJ's full outlook report present a clear explanation of the bank's confidence around wages and prices, and hint at the policy implications.

The BOJ didn't change policy, but once again, sounded incrementally more confident, issuing a FY26 core inflation forecast of +2.1%. That outlook makes policy rates still near zero look very low.

While not yet certain, it looks like the recent fall in services PPI might be bottoming. That is important for a BOJ that will want to sound more hawkish given rising $JPY.

Export volumes haven't responded to JPY weakness, but profits have. That's feeding into manufacturing sentiment, which is better than history, and better than the rest of the world. With services sentiment also strong, the BOJ can continue to argue the macro cycle is warming up.

We estimate that sequential core CPI inflation turned negative in March. The macro backdrop suggests that should be temporary, but uncertainty about the real strength of the domestic inflation dynamic constrains the BOJ's ability to respond to the unhelpful weakness in the JPY.

We take a detailed look at services prices, which account for 50% of the CPI basket, and need to continue to rise if inflation is to be sustained.

Consumer confidence for March gives reasons to think that stronger consumption will drive continued economic recovery in 2024.

The details of the Tankan survey reinforce the message of the headlines: the labour market is tightening further, and price pressures are rebounding.

The headlines from the Tankan look pretty positive for the BOJ, with sentiment solid, the labour market tightening further, output prices easing only slightly, and capex plans holding up.

The upside risk for Japan and the Bank of Japan is a fall in headline wages and a long-awaited recovery in consumption that lifts aggregate demand. There are some signs of that process falling into place, but they remain tentative.

Former BOJ governor Shirakawa continues to argue Japan's problems are about demographics, not deflation. His thesis is worth studying, even if it is not shared by the current leadership in the bank.