Japan – underlying dynamics still solid
Headline inflation data continue to be affected by policy measures to control energy and public services prices. The underlying picture is more stable, with core private services inflation of around 2%, PT wage growth of 5%, and PMIs above 50. The big risk, of course, is the impact of the Iran war.
Japan – underlying inflation expectations up
Expected inflation rose in the Cabinet Office's annual firm survey. The backdrop is stable growth, and strong capex and hiring intentions – and rising wages. This is different from when the Ukraine war started in 2022, and suggests there is a real inflationary risk for Japan from the Iran conflict.
Japan – solid GDP and wage growth
The backdrop to the latest oil price surge is different to that of 2022. Then, wages were barely rising. This time, wage growth is at least 2%, and not slowing. With cycle momentum picking up too, there is more of a risk that a Middle East war (if it is short) further raises nominal momentum.
Japan – profits and capex strong
The Q4 data showed corporate profits and capex remaining strong, but little change in firms' huge cash holdings. The labour share has bottomed, but isn't rising. Separate data show unemployment creeping up, which will become a bigger concern if the war with Iran causes a cycle problem.
Japan – lower headline CPI, stronger retail sales
My framework for this year is an easing of tariff and price shocks that give a boost to domestic activity. Today's February data for Tokyo show the fall in headline inflation in January is persisting. Retail sales in January did jump, but these data can be noisy. IP is trending up, but slowly.
Japan – strong PMIs, weaker inflation
Manufacturing sentiment is up, and falling headline inflation should further boost the mood of households too. For the BOJ, the critical issue will be whether these improvements in soft data feed into real aggregate demand, in turn supporting its confidence about the trend in underlying inflation.
Japan – GDP details better than headlines
Growth in Q4 was only +0.1% QoQ, but that was partly because of a running down of inventories. Underlying demand was better, and given the strength of business and consumer confidence, the outlook for growth in 2026 is more positive.
Japan – import prices up, but export prices up more
Import prices aren't rising quickly, but they do remain elevated, supporting PPI in a way that wasn't true during Japan's long deflation. More interesting now is the strength of export prices, a dynamic that boosts exporter profits, and via the terms of trade, provides a tailwind for domestic income
Japan – cycle still strengthening
Takaichi's huge win comes when the cycle is looking stronger, with real wages close to rising, manufacturing sentiment improving and bank lending strong. This should give the BOJ confidence, and, with the current account surplus in 2025 reaching the highest level in forty years, also help the JPY.