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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.
The BOJ appears confident that the labour market is tightening, edging Japan closer to a reflationary cycle. The Q4 Tankan, showing sticky inflation and continued labour market tightness, will reinforce that view. That suggests that the bank will continue with the gradual shift in policy.
Wage growth remains sluggish. However, while gradual, overall it is picking up, and there are now tentative signs of acceleration in part-time hourly earnings. That makes sense given labour supply is running into constraints, though labour demand obviously now needs to hold up.
One reason for the sluggish recovery out of covid is Japan entering a new stage of ageing, which is resulting in a faster rate of population decline. That is because of a fall in the number of adults, which cuts aggregate consumption, but should mean per capita wage growth starts to accelerate.
Fiscal and monetary policy have been negative for household incomes, which are now the weak link in the economy. That context helps explain deputy governor Himino's speech today, which seems to mark an effort by the BOJ to argue that higher rates might not be so bad for the economy after all.
Tokyo CPI for November reinforces the message of national CPI for October that inflation has peaked. With $JPY turning too, that makes the macro outlook for Japan more positive. That's because it removes a factor that has been weighing on real incomes, clearing the way for a consumption recovery.
Japan's labour market continues to go sideways. We think that is unlikely to change without an acceleration in economic growth and thus labour demand. But if that does happen, there are reasons to think the upturn in per capita wage growth could be significant.