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.