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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.
Not just in Japan but Taiwan too, there are signs of a structural break from persistently low wage inflation. The implication is that the gap between nominal monetary settings between both and the US is likely to be narrower in the future than it has been in the past.
Two recent surveys from the Cabinet Office highlight Japan's labour market tightness. In its annual survey released at the end of February, hiring intentions are the highest since the 1990s. And today's quarterly survey shows worker shortages rose again from Q4.
It was no surprise that capex was revised up in the second release of Q4 data, but consumption was revised down. We would expect consumption to recover from here, as imported inflation eases and nominal wage growth accelerates.
Even more than the PMI, the EW survey points to Japan's cycle having decent momentum. There is upside risk around that, because consumption has yet to recover, while it looks like the shunto wage round will be strong. That is the backdrop for increasingly confident commentary from the BOJ.
Headline inflation in Tokyo in February rose from 1.8% YoY to 2.6%. So inflation isn't disappearing. But underlying measures don't suggest that inflation really is accelerating either, with core settling around 2% annualised. At the same time, the PMI shows services momentum remaining firm.
The big bounce in capex in Q4 suggests an upwards revision for GDP, and if sustained, potentially better productivity growth. However, wage growth was soft, and as a result, there wasn't much reversal of the sharp fall in the labour share of Q3.
Consumer confidence rose again in February, despite inflation expectations in the survey staying high. That hints at rising real wages. This makes a recovery in domestic consumption more likely, and if that occurs, the economy this year will be stronger this year than the BOJ expects.
Headline CPI dropped in January to the lowest in a year. Sequential core also continues to ease. That, however, remains above 2%, and our calculations of the BOJ's measures of underlying CPI ticked up in January. Overall, inflation looks stable, but with the one caveat of the drop in services PPI.
GDP contracted again in Q4. One driver is JPY weakness, which is boosting services exports, but cutting into consumer purchasing power and consumption. With nominal wage growth looking firm, this backdrop makes it more likely the BOJ moves on policy, with one aim being to stabilise the JPY.
Deputy Governor Uchida's speech this week reiterated the BOJ's confidence that the economy is nearing a virtuous cycle between wages and prices. He added interesting detail on four specific areas: consumption, wages, policy, and the outlook for potential growth.
Both the Economy Watchers and PMI surveys were strong in January, led by non-manufacturing and services. Commentary in the PMI suggests this stronger momentum isn't about to be lost. The upside risk is this reflects the long-awaited recovery of domestic consumption.
Underlying wage growth accelerated in Q4. That is consistent with the confidence being expressed by the BOJ in recent weeks. But headline wages – including overtime and bonuses – continue to fall in real terms, which in turn weighs on consumption and so overall aggregate demand.
The summary of the BOJ's discussions at last week's Board meeting gives an impression of even more confidence than expressed in other recent statements. The hard data still aren't that strong, but surveys continue to improve, with consumer confidence in today's survey approaching pre-covid levels.
Tokyo CPI fell quite sharply in January. That's a reminder that the peak for inflation is in the past, and provides justification for the BOJ's cautiousness. But services PPI in December was still firm, and BOJ minutes today show the same cautious bullishness seen in other recent statements.
The BOJ's full outlook report once again presented a constructive view of the outlook for wages. Importantly, the bank's view seems to be based on surveys and qualitative indicators more than hard data on the labour market.
The BOJ didn't change policy today, but sounded incrementally more positive about the outlook. There remain strong reasons to think that the bank will end negative rates sometime soon.
We don't think data since December will change thinking at the BOJ. The bigger considerations are downside risks from the earthquake, and upside for inflation from renewed JPY weakening. If the bank's meetings during 2H23 were all 'live', then the same is true right now.
Wage growth was weaker in November, but because of bonuses. Scheduled wages for full-time workers ticked up, and there was a decent rise in hourly wages for part-timers. Even that rise looks a bit tentative, but the BOJ seems to believe the labour market is tighter than the official data suggest.
Headline inflation has eased, but core excluding food and energy remains over 2%, and shows no sign of sequential deceleration. The BOJ is likely to continue to edge towards arguing that inflation is sustainable.
The BOJ remains more confident than we would be looking at the hard data, which over December were soft. That said, the fall in US rates does improve the picture, lessening the real income squeeze of 2022-23. Given the BOJ's attitude, that likely means further "normalisation" of policy in 2024.