Economic Snapshot: Japan

Konnichiwa, forex friends! Pip Diddy pointed out in his latest Top Forex Market Movers of the Week that the yen was one of the weakest currencies last week, thanks to threats of intervention from Japanese government officials. If that made you wanna see how Japan’s economy is doing lately, then this economic snapshot is just for you.

Note: As with all Economic Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.

Growth

  • The final estimate for Japan’s Q4 2015 GDP reading was revised from a 0.4% quarter-on-quarter contraction to a slightly slower 0.3% contraction.
  • This is still worse than Q3’s 0.3% expansion, however.
  • The 0.9% decline in consumer spending was actually the major drag, subtracting 0.5% from the quarter-on-quarter reading (+0.2% positive contribution previously).
  • The negative contribution from consumer spending was partially offset by positive contributions from business investment (0.2% vs. 0.1% previous), government spending (0.1% vs. 0.0% previous), and net trade (0.1% vs. 0.2% previous).
  • The positive contribution from trade was due to imports (-1.4%) contracting much faster than exports (0.8%).
  • Year-on-year, GDP grew by 0.7%, which is significantly slower than the previous quarter’s 1.7% expansion, but at least GDP has been in positive territory for three straight quarters now after four consecutive quarters of stagnation.
  • On a year-on-year basis, consumer spending was also the major drag, subtracting 0.8% from GDP growth.
  • Net trade didn’t contribute anything to year-on-year growth.
  • Annual growth was powered mainly by business investment, which had a positive contribution of 1.2%.
  • However, the buildup in inventories accounted for more than half of business investment, with inventory contributing 0.7% to GDP growth.
  • Government spending also supported the Japanese economy, adding 0.3% to year-on-year GDP growth.
  • Weakening consumer spending would mean less domestic inflationary pressure.

Employment

  • The jobless rate in March ticked lower to 5.2% from 5.3%.
  • The details of the jobs report are not as optimistic, however, since the lower jobless rate was due to the number of employed persons dropping from 64 million to 63.87 million while the number of unemployed held steady at 2.16 million.
  • The exodus of workers who left the labor force caused the labor force participation rate to drop to a 1-year low of 59.2% (59.3% previous).
  • The labor force participation has been sliding for two straight months after peaking at 59.7%.
  • On a more upbeat note, nominal wages grew by 1.4% year-on-year in March, which is the fastest annual wage growth in almost two years.
  • Nominal wages have been growing for two consecutive months now after stagnating for three straight months.
  • It gets even better because real wages (wages that take inflation into account) grew at 1.4%, which is the biggest gain ever since 2010.
  • Real wages have also been growing for two straight months after contracting or stagnating in the past few months.

Inflation

  • Headline CPI increased by 0.1% month-on-month in March.
  • Lower energy prices continue to dampen Japan’s CPI reading on a month-on-month basis.
  • Year-on-year, headline CPI contracted by 0.1% on a year-on-year basis, due mainly to a 13.3% decline in the energy index.
  • The core reading (headline less fresh food), meanwhile, stumbled by 0.3%, which is a harder drop and the biggest drop since April 2013, because food prices saw an increase and those are stripped from the core reading. The BOJ usually doesn’t pay attention to this reading, however.
  • As for the so-called “core-core” reading (headline less food and energy), which is the reading that the BOJ usually looks at when determining the underlying trend, it’s still in positive territory, but it ticked lower to 0.7% (0.8% previous).
  • The core-core reading has been ranging between 0.4% and 0.9% in the last 12 months.

Business Conditions & Sentiment

  • Markit’s final reading for Japan’s April manufacturing PMI came in at 48.2, which is the lowest reading since January 2013.
  • This marks the second month that the manufacturing PMI reading has been below the 50.0 stagnation level.
  • This also marks the fourth consecutive month of deteriorating readings.
  • According to the details of the PMI report, new orders fell to its weakest level since December 2012, due to “a weaker Asian economy leading to a slump in foreign demand.”
  • Exports also fell at the “sharpest rate since January 2013.”
  • Input costs, particularly for oil and metals, also fell at the fastest pace in three-and-a-half years, which led to lower selling prices for the fifth consecutive month.
  • Markit’s final April services PMI printed a 49.3 reading, which is the first reading below the 50.0 level in over a year.
  • Japan’s services PMI reading has been deteriorating for three consecutive months now.
  • Despite deteriorating conditions, business sentiment in the service sector climbed to an eight-month high.
  • Moving on, industrial production increased by 3.6% month-on-month in March after a substantial 5.2% contraction during the previous month.
  • On a year-on-year basis, industrial production only increased by 0.1%, but it’s the first increase after three months of contractions.
  • The main contributors to industrial production came from transport equipment manufacturers, manufacturers of general-purpose equipment and business-oriented machinery, as well as the fabricated metals industry.

Consumer Sentiment & Spending

  • Compared to February, retail sales increased by 1.4% in March, but declined by 1.1% when compared to the same month during the previous year.
  • Total household spending in real terms (taking inflation into account), meanwhile, fell by 5.3% year-on-year.
  • This is the steepest decline since March 2015 and resumes the downtrend that was interrupted by the previous month’s 1.2% increase.
  • As for consumer confidence, it fell to 40.8 in April (41.7 previous) deteriorating sentiment on overall livelihood (39.6 vs. 40.5 previous), lack of enthusiasm on employment (42.8 vs. 43.9 previous), and a weaker propensity to buy durable goods (39.8 vs. 41.7 previous)

Trade

  • Japan’s seasonally-adjusted trade surplus widened to 0.28 trillion in March.
  • Exports continue to contract on a year-on-year basis, however, contracting by 6.8% in March.
  • Exports have been in contracting for six straight months now.
    Imports have also been contracting for over a year, contracting by 14.9% in March.

Japan's Economy: Growth

Japan's Economy: Employment

Japan's Economy: Inflation

Japan's Economy: Business Conditions & Sentiment

Japan's Economy: Consumer Sentiment & Spending

Japan's Economy: Trade

Putting it all together

Weaker consumer spending was a drag on Q4 2015’s GDP growth (both q/q and y/y readings), and it looks like consumer spending is set to be a drag yet again, so keep that in mind if you’re planning to trade this coming Tuesday’s release (May 17, 11:50 pm GMT) of Japan’s preliminary Q1 GDP reading.

Weak consumer spending also means less domestic inflationary pressure, which is not very promising for Japan’s subdued CPI readings. And while trade has been printing a surplus month after month during the Q1 months, which will likely boost quarter-on-quarter Q1 GDP growth, a closer look at the details shows that trade is still weak compared to a year ago. And the yen’s recent strength probably isn’t helping in that respect, which is why Japanese government officials have been talking about a possible intervention in the past couple of weeks.

Manufacturing and services PMI readings are also pointing to a likely poor start for Q2, and that’s something that the BOJ will likely consider.