Monthly Review: More Signs of Improvement in Japan?

Will the Bank of Japan be the next major central bank to end its easing cycle? The transcripts of their meetings reveal that policymaker Kiuchi has been voting to taper asset purchases, which suggests at a potential shift to a less dovish stance once other BOJ officials show their support. Let’s take a look at the latest set of economic figures from Japan to find out if this is bound to happen soon.

Inflation

japan inflationFor the third month in a row, Japan’s national core CPI beat expectations and eased fears of deflation in the country. The report showed a 0.1% uptick in Japanese core price levels for May instead of staying flat, following the stronger-than-expected 0.3% uptick seen last April. In Tokyo, core CPI increased by 0.1% as expected.

Now this may not seem like much, but you have to remember that the current prices of goods and services are being compared to post-tax hike price levels. Recall that the Japanese government raised the consumption tax from 5% to 8% back in April 2014 in order to trim the budget deficit, putting upward pressure on domestic price levels. However, this caused a nasty drag on consumer spending, as it also weighed on the Japanese yen’s purchasing power.

Consumer Spending

Japan’s household spending report for May suggests that consumers are starting to recover from the effects of the sales tax hike, with the report printing an impressive 4.8% year-over-year gain and marking its first positive reading in more than a year. This is loads better compared to the projected 3.5% increase and reflects a strong rebound from April’s 1.3% annualized decline.

Of course forex analysts are also quick to point out that these spending figures are also being compared to post-tax hike consumer behavior, which chalked up a pretty sharp drop last year. Besides, one or two data points aren’t enough to show an uptrend so market watchers will have to hold out for a few more months of positive readings before concluding that a rebound is taking place.

For now, consumer confidence is still feeble, as the sentiment index for May dipped from 41.5 to 41.4 instead of climbing to the projected 41.9 figure. Components of the report showed an improvement in the overall livelihood indicator and the income growth index while the employment reading and the willingness to buy durable goods index declined.

Manufacturing

When it comes to business activity in Japan, the picture ain’t so rosy just yet. While the industrial production figure for April was upgraded from 1.0% to 1.2%, the tertiary industry activity index for the same month printed a worse-than-expected 0.2% decline and the all industries activity index had a bleak 0.1% uptick.

Leading indicators don’t seem to be too upbeat either, as the BSI manufacturing index reported an unexpected tumble from 2.4 to -6.0 for the current quarter and the flash manufacturing PMI for June indicated a return to industry contraction. Economists at Markit, which is the agency responsible for crunching the numbers to generate PMI readings, noted that new orders fell for the third time this year and that employment growth was subdued. On a brighter note, they also pointed out that the yen’s depreciation was partly responsible for keeping export demand supported.

Export Activity

Speaking of exports, Japan’s May trade balance did show some green shoots, as the deficit narrowed for back-to-back months to a shortfall of 0.18 trillion JPY. On a year-over-year basis, this represents a whopping 76.5% reduction from the May 2014 trade deficit. Sake shots for everybody!

Underlying data showed a 2.4% increase in export values for May, following April’s 8.0% jump in shipments and chalking up its ninth monthly gain in a row. It’s worth noting, however, that export volumes were actually 3.8% lower due to declining demand for automobiles, construction machinery, and mining equipment. The value of imports fell by 8.7%, logging in their fifth consecutive monthly decline due to the tumble in crude oil and other energy-related imports.

In a nutshell, the latest reports from Japan are indeed showing signs of life, particularly when it comes to spending and inflation. Whether the country can maintain its momentum with this recovery remains to be seen, as the challenges faced by the rest of the global economy appear to be weighing on Japan’s manufacturing and export activity. For now, the yen could be shielded from potential forex declines, knowing that further easing from the BOJ doesn’t seem to be necessary any more.