Monthly Economic Review: Japan

The Bank of Japan (BOJ) maintained the current monetary policy but most of its officers were shown to be a tad more optimistic in the latest monetary policy statement when compared to last time. BOJ Governor Haruhiko Kuroda and BOJ board member Takahide Kiuchi were even showing how genki (that’s Japanese for “enthusiastic” or “energetic”) they were for the Japanese economy. But did the latest data dump support this? Let’s find out!

Growth

Japanese Q1 2015 GDP expanded by 0.6%, the second consecutive quarter of expansion to date and a welcome surprise over the expected 0.4% expansion. On an annualised basis, this translates into a 2.4% growth which is significantly better than the expected 1.5% growth. But analysts warn that everything is not as it seems because inventory was one of the biggest contributor to the expansion, contributing 0.5% to the annualized GDP growth.

But is having larger inventories bad? Well, it depends on how the market will perceive it. If the inventory build-up is not sustained, then we may see Q2 2015 GDP growth decline. But since the data is widely available, it’s possible that forex traders may have already priced that in when the next GDP reading comes around. But the question remains: is this currently widely known among forex traders? It’s hard to say, but going back to the recent inventory build-up, such a build-up is actually good since it means that business activity is picking up.

Looking at the other data points, it almost seems like the Japanese economy is shifting from an export-driven economy to one driven by domestic demand. Private demand grew by 1.1%, adding 0.8% to the annualised growth while net exports subtracted 0.2% from the annualised growth since imports grew faster than exports at 2.9% and 2.4% respectively. Speaking of domestic demand…

Spending

The latest readings for household spending and retail sales both failed to meet expectations, but a closer look will make forex traders stop and think. Household spending did decrease by 1.3%, but this is still a large improvement over the previous 10.6% decrease. Also, year-on-year retail sales only grew by 5.0%, but this is still much better than the previous 9.7% decrease. So is it all good? For now, yes. But the future may potentially be bleak since consumer spending is actually being held down by Japan’s consumption tax. Not only that, but this consumption tax is scheduled for a hike from 8% to 10% by 2017, which would be pretty bad since consumer spending currently accounts for around 60% of Japan’s economy.

Employment

If you read my last Japan Jobs Update, you’ll remember that I was expecting Japan’s jobless rate to decrease further. Well, I was right! Japan’s jobless rate for April fell to 3.3% from 3.4%, the lowest since April 1997. Also recall that I was a bit pessimistic because I was expecting the labor force participation rate to decline too. Well, I was wrong because it actually increased slightly by 0.3% to 59.4%. Productivity also jumped to 109 from 96.5 while wages grew by 0.9%, which is the first time in two years that wages grew faster than the cost of living. Overall, Japan’s labor market seems pretty sold.

Business Sentiment

Business sentiment appears to be picking up, especially in the manufacturing sector. Manufacturing PMI is at 50.9 (49.9 previous) while services PMI is at 51.5 (51.3 previous). Capital spending also increased by 7.3%, a major improvement over the previous 2.8% increase, and core machinery orders was up by 2.9% (-1.4% previous). Nothing much to say, really.

Inflation

Looks like last year’s slump in oil prices is finally wearing off. The core inflation rate increased by 0.3% year-on-year, an improvement over the previous 2.2% increase. Forex Gump! Forex Gump! The more recent figure is lower than the older figure, isn’t that bad? Usually, yes. But remember that the sales tax in April 2014 gave an artificial boost to inflation. If we take that into account, then the actual inflation rate for the previous reading is only 0.2%, making the recent 0.3% an improvement. Tokyo core CPI, meanwhile is up by 0.2% (0.4% previous). Overall, inflation data is not all that stellar and is still a far cry from the BOJ’s 2% inflation target, but it’s slowly getting there.

Final thoughts for my fellow forex traders

It seems to me that the BOJ’s optimism does indeed have substance. But do take into account that a lot of work is still required. It’s been two years since the quantitative easing program was started but we are only seeing the results now, and its not even guaranteed that such positive developments will hold. Also, the rise of wages has been slow and the increase in the price of goods has been likewise slow. And don’t forget that consumer spending is being suppressed by the 8% consumption tax, and said consumption tax is scheduled to increase to 10% by 2017, even though it seems like the Japanese economy is shifting from an export-driven model to one driven primarily by domestic demand.

Sorry for the downer ending. I know that this report has been very optimistic, and I just wanted to ground you guys on the reality of the situation. Well, that’s all for now! Stay tuned!

  • ForExchange

    Hi Forex Gump,

    the JPY has lost huge amount of pips vs many currencies and is on historical high for a couple of them. I will definitely wait until those long-term trend change and jump into the new trends. I do believe some of those currencies cannot increase forever and if you say Japan makes slow steps into positive direction, well some other countries do not make any steps at all 🙂 So in my eyes Japan is in the middle of the pack for now.

    Have a nice weekend,
    FE

    • Thanks for checking out my blog and for sharing your thoughts as always. For now it looks like the yen might function more of a counter currency and just react to risk flows, unless of course there are any clear signals from the economy or the BOJ. Let’s see!