Konnichiwa, forex friends! BOJ Governor Haruhiko Kuroda has been getting a lot of press time lately, but his rhetoric has been rather nasty for yen bulls.
He said, for example, that there’s a “sufficient chance” of further easing moves in September.
He also said that the BOJ would use its monetary policy tools “without hesitation” in order to revive inflation. If Kuroda’s recent comments made you wonder about how Japan’s economy is doing, then today’s edition of my economic snapshot can help you out.
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.
- Japan’s economy stagnated on a quarter-on-quarter basis in Q2 2016 (0.0% vs. 0.2% expected, 0.5% previous).
- Only the preliminary report has been released so no year-on-year estimates yet.
- But just for reference, Q1 2016 GDP only grew by 0.1% year-on-year, which is the weakest rate of expansion in four quarters.
- There is no clear trend for the quarter-on-quarter reading.
- However, the year-on-year reading has been weakening for two consecutive quarters after peaking at 1.8% in Q3 2015.
- Looking at the details of the GDP report, consumer spending, private residential investment, and public investment each contributed about 0.1% to total GDP growth.
- These were offset mainly by net trade, which subtracted around 0.3% from total GDP growth.
- The negative contribution from trade was mainly due to the 1.5% contraction in exports.
- Other than trade, the contraction in business investment was the only other drag to GDP growth.
- The jobless rate ticked lower to 3.0% from 3.1% during the July period.
- This marks the second consecutive slide in the jobless rate.
- Also, the jobless rate for July is the lowest reading on record since May 1995.
- However, other details are not so upbeat since the number of employed persons dropped from 64,970K to 64,790K.
- Meanwhile, the working-age population increased by 50K to 110,810K.
- As a result, the labor force participation eased from a seven-year high of 60.5% to 60.3%.
- The drop in the labor force participation rate was the main reason for the drop in the jobless rate.
- Although the decrease in the number of unemployed people from 2,100K to 2,030K helped too.
- As for earnings, nominal wages grew by 1.4% year-on-year in June after contracting by 0.1% in May.
- It gets even better because real wages (wages that take inflation into account) grew by 2.0%, which is the biggest gain ever since 2010.
- Real wages have also been in positive territory since February of this year.
- Headline CPI fell by 0.2% month-on-month in July.
- This is the worst reading in six months and also marks the second straight month that headline CPI has been negative.
- After three months of positive contributions, the energy index became a drag in July.
- This is one of the major reasons why the core reading (headline less fresh food) also fell by 0.2%.
- Most of the other components were flat, but the price of clothing and footwear fell by 2.6% month-on-month.
- That’s why the so-called “core-core” reading (headline less food and energy) also fell by 0.2%.
- The BOJ mostly pays attention to the “core-core” reading, and it’s worth noting that it has been in negative territory for two straight months as of the July reading.
- The July reading is also a six-month low.
- Year-on-year, headline CPI contracted by 0.4%.
- The energy index was still the major drag, albeit less so than previous (-11.3% vs. -12.0 previous).
- Fresh food prices increased at a faster rate (+0.7% vs. +0.1% previous), which is why the core reading (headline less fresh food) fell by 0.5%, which is a harder fall than the headline reading.
- As for the “core-core” reading (headline less food and energy), it increased at a slower pace when compared to the previous reading (+0.3% vs. +0.5% previous).
- This was due to weaker readings for recreational costs (+0.8% vs. +1.3% previous), medicines (+0.9% vs. +1.0% previous), and communications (-1.3% vs. -0.4% previous).
- Annual headline CPI has been in negative territory for four months now.
- The annual core-core reading, meanwhile, has been in positive territory since October 2013.
- However, the most recent reading is the lowest since the core-core reading turned positive in October 2013.
Business Conditions & Sentiment
- Markit’s preliminary reading for Japan’s August manufacturing PMI improved from 49.3 to a six-month high of 49.6.
- Japan’s manufacturing PMI has been below the 50.0 stagnation level for six months running, but it has been steadily climbing higher for three straight months.
- Commentary from the report noted that manufacturing output increased for the first time since February of this year.
- However, additional commentary warned that there was a “slight drop in employment for the first time since last September.”
- Also, “relatively weak client demand alongside a strong yen prompted firms to cut their selling prices at the sharpest rate since October 2012.”
- Moreover, total new work and exports continued to decline.
- As for Markit’s final July services PMI, it came in at 50.4, up from June’s 49.4 reading.
- According to the PMI report, new orders fell for the second straight month, albeit at a much slower pace when compared to June’s sharp decline.
- Despite the positive headline reading, business sentiment fell to a four-year low.
- According to Markit, “Exactly one-in-ten surveyed companies anticipated a fall in business activity over the coming year.”
- Business confidence weakened because of “forecasts of softer demand from both the domestic and international markets, an aging society, ‘Brexit’ and uncertainty surrounding the Chinese economy.”
- Moving on, monthly industrial production flat-lined in July after increasing by 2.3% previously.
- On a year-on-year basis, industrial production contracted by 3.8%.
This is the worst reading in six months.
Consumer Sentiment & Spending
- Consumer confidence in Japan fell from a five-month high of 41.8 to 41.3 in July.
- The slide in confidence was due mainly to pessimism over income growth and employment.
- Fortunately, the slide in confidence did not translate to weaker consumer spending since retail sales increased by 1.4% month-on-month.
- This is the best reading in four months.
- On an annual basis, however, retail sales fell by 0.2%.
- But on a more upbeat note, this is the best reading in five months.
- Also, the annual reading has been steadily improving for the second consecutive month after bottoming out at -2.1% back in May.
- Total household spending in real terms (taking inflation into account), meanwhile, rebounded by 2.5% month-on-month.
- The rebound is the best reading since August 2015 and also ends two straight months of declines.
- On a year-on-year basis, however, total household spending fell by 0.5%.
- But on the bright side, this is better than the sharp 2.2% decline printed back in May.
- Also, the most recent reading is the best in three months.
- Japan’s seasonally-adjusted trade surplus narrowed to ¥0.32 trillion in July.
- The narrower trade surplus was due to a 4.9% drop in exports being partially offset by the 2.2% slide in imports.
- Also, exports continue to contract on a year-on-year basis, contracting by 14.0% in July.
- This is the sharpest decline since October 2009.
- Annual exports have been in contracting for ten straight months now.
- Imports have also been contracting for over a year on an annual basis, contracting by 24.7% in July.
- The drop in exports was broad-based, with exports to Japan’s main trading partners all down.
- Exports to the U.S. fell by 11.8% while exports to China and the E.U. fell by 12.7% and 6.5% respectively.
Putting it all together
Q2 GDP growth stagnated on a quarter-on-quarter basis, with trade being the main drag. And based on the trade data for July, it looks like trade may be a drag yet again. Consumer spending rebounded in July, though, and that will likely cushion the negative impact from trade.
However, the main problem that Kuroda has been pointing to is inflation. And the most recent inflation numbers were pretty bad across the board. The “core-core” reading in particular, which is the reading that the BOJ tends to focus on, was really bad.
The monthly “core-core” reading has been negative for the second consecutive month, and the most recent reading is the lowest in six months.
And while the year-on-year reading is still in positive territory, the most recent reading is the lowest ever since the “core-core” reading started consistently churning out positive numbers in October 2013. Overall, it looks like BOJ Kuroda is right to be worried.