The platform for tracking and understanding East Asia macro
We finish off our series looking at household incomes in Japan, to add a bit more analysis, bring together the findings of the three reports, and think about the policy implications.
There's no big change in inflation, but the details in October hint that it might be starting to lose some momentum. That would be helpful for consumption. Without that, services activity at least remains firm, supported by tourism.
Q3 GDP was in line with monetary policy: exports rose, but consumption fell. Perhaps with time, higher exports would boost domestic demand. The BOJ, but particularly the government, can't wait that long. Either the market pushes $JPY down, or policy will move to try to achieve that outcome.
In the second of two longer notes looking at household sector dynamics, we widen the perspective to include savings as well as incomes. Elderly households have the highest wealth levels, but it seems unlikely they run down those assets when current incomes are under so much pressure.
At a bit under 2%, nominal wages in Japan are growing more quickly since covid than they did before. That doesn't look to be slowing, but nor are there strong signs of acceleration. It doesn't help that other labour market indicators continue to be mixed.
The BOJ's detailed outlook report includes three detailed boxes addressing inflation dynamics. The argument is the labour market is tightening, but import price pressures easing, while the feed-through from wages to prices is still not strong enough.
While overshadowed by the BOJ meeting, the consumer confidence and retail sales data released today suggest consumption continues to struggle. In its summary outlook, the BOK mentioned "uncertainties" ten times, even more than the eight mentions at the last meeting in July.
According to September data released today, the labour market continues to go sideways. Real household income growth and consumption also remain weak. But statistics released last week show inflation excluding food, energy and rent is now higher in Japan than in the US.
Tokyo CPI bounced in October, and services PPI was strong in September. With core CPI also holding up, inflation certainly remains firm. However, the details don't suggest inflation is yet accelerating, with the Markit PMI showing a slowing of activity and inflation. Labour market data remain mixed.
A longer note, looking at Japan's key imbalance: weak household incomes and spending. One over-looked driver is falling real pensions. That implies wages need to be even stronger than the market believes, and so policy looser. But that risks boosting import prices, and so cutting real incomes.
Trends shown by the two data releases on Friday are related: first, wage growth below inflation, and second, weak consumption. If the labour market doesn't tighten and wage growth lift, the BOJ will be pressured to raise rates to stop JPY depreciation, and so hold back imported inflation.
The BOJ Tankan indicates activity is decent, inflation not likely to subside much, and that the labour market should tighten a lot more. This is all likely to make the BOJ more hawkish than not, but we'd still prefer to see the labour market tightening getting reflected in actual unemployment.
Headline inflation in Tokyo eased in September, but while inflation expectations remained firm, consumer confidence didn't fall much. That could be important, but we would be more confident about the implication of rising real wages if the labour market was also tightening.
The BOJ today left policy unchanged, and inflation in August also didn't move much. The first cut of part-time wages for August was sluggish. That's important when the flash PMI for September suggests the services recovery is now fading.
Today's BSI survey suggests growth momentum remains strong. It is also indicating the labour market is about to tighten quite a lot more. For us (though less so for the BOJ) that has been the missing ingredient in Japan's recovery, and so it would be important if that is now changing.
The post-covid recovery is still early, with domestic demand still weak. Full-time wage growth isn't changing much, but in July, part-time wages grew 4% YoY. That isn't enough when commodity price inflation is picking up, and means renewed pressure for JPY intervention.
Japan's labour market recovery remains sluggish. That doesn't seem to worry the BOJ, and consumer confidence is suggesting some improvement in nominal earnings. We'd have more confidence that this could continue if published nominal wage growth was also picking up.
Headline inflation in Tokyo did fall in August, suggesting feed through from the sharp fall in goods PPI of recent months. But core inflation was stable at around 2.5%, and services PPI in July was also firm.
The PMIs for August were solid, though concern was expressed about a renewed rise in energy prices. That could impact consumer confidence, as even part-time wage growth remains below inflation. However, the BOJ continues to think the labour market is tightening.
While headline inflation and exports are falling in Korea and Taiwan, CPI and external shipments are holding up in Japan. Weaker import prices should still mean some downwards pressure on CPI through to year-end, but there will be an offset if the labour market tightens and rentals rise.
NGDP growth in Q2 surged, but RGDP growth was less impressive, and driven all by exports. Last week's EW survey suggests the recovery still has room to run. Missing so far is private consumption, which needs inflation to fall and wage growth to rise. There's more sign of the former than the latter.
Consumer confidence in Japan is recovering, even though inflation expectations remain high. That hints at a bullish, positive reflation dynamic. That would seem more convincing if the labour market was running hot, but June data show labour demand and supply dynamics remaining merely warm.
The BOJ's detailed Outlook report is always worth reading, with two special boxes in today's report looking at inflation. They contained interesting material, but the conclusions were equivocal, fitting with the bank's warning about "extremely high uncertainties".
In raising rates on Friday, the BOJ said that it wasn't tightening because inflation was still below its 2% target. But while it didn't raise its inflation forecasts, it did alter its assessment of risks. In that context, the labour market tightening we expect becomes even more important.
Upstream inflation continues to ease. That is feeding into headline CPI, and given lags, that process is far from over. However, there are some signs that the fall in commodity prices has now reached a floor, and core CPI is starting to look sticky. We'll find out soon what the BOJ thinks of this.