Konnichiwa, forex friends! As Pip Diddy has been pointing out with glee in his weekly recaps, the yen has been consistently one of the worst-performing currencies for over a month now. If that made you wonder how Japan’s economy is faring, or maybe you just want an overview of the Japanese economy ahead of this week’s BOJ statement, then this economic snapshot may be 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.
- The final estimate for Japan’s Q3 2016 GDP reading was revised lower from a 0.5% quarter-on-quarter expansion to just 0.3%.
- This marks the second quarter of weakening quarterly growth.
- The downgrade was due to private non-residential investments falling by 0.4% (+0.0% originally), weaker government spending (+0.3% vs. +0.4% originally), and weaker exports (+1.6% vs. +2.0% originally).
- These were partially offset by stronger consumer spending (+0.3% vs. +0.1% originally), stronger private residential investment (2.6% vs. 2.3% originally), and the 0.1% increase in government investment (-0.7% originally).
- Year-on-year, GDP grew by 1.1%, which is faster than the previous quarter’s 0.9% rate of expansion.
- The annual reading has been increasing at a faster pace for two consecutive quarters.
- On a year-on-year basis, inventories was the greatest drag, since it subtracted -0.3% from total GDP growth.
- The only other drag was the 1.8% drop in government investment (-2.2% previous), which subtracted 0.1% from total GDP growth.
- Net trade was the major driver, adding 0.7% to total GDP growth.
- In fact, net trade is also the reason why GDP grew at a faster annual rate, since net trade only contributed +0.2% to total GDP growth in Q2.
- However, the larger contribution by net trade in Q3 was due to imports slumping by 3.3% (-0.7% in Q2).
- Exports actually grew at a slower pace (+0.4% vs. +0.5% in Q3).
- Japan’s jobless rate held steady at 3.0% during the October period.
- This is the lowest jobless rate on record since May 1995.
- The other labor indicators also seem upbeat since the number of employed people increase from 64.49 million to 64.55 million.
- At the same time, the number of unemployed persons fell from 2.02 million to a multi-year low of 1.97 million.
- However, the labor force participation rate did tick lower, thanks to the labor force shrinking from 67.01 million to 66.90 million while the working-age population increased from 110.80 million to 110.83 million.
- Retirement was likely a factor, since the number of people aged 55-64 fell from 11.67 million to 11.57 million.
- Actual difficulty in finding jobs and discouragement may have also been a factor, however, since the number of people aged 35-44 also fell from 15.14 million to 15.01 million.
- As for earnings, nominal wages were stagnant in October, showing a measly 0.1% year-on-year increase.
- Nominal wages have been stagnant on an annual basis for three months running.
- Real wages (wages that take inflation into account) were also a disappoint, since real wages were flat at 0.0% in October.
- This is the first stagnant reading since real wages climbed into growth territory back in February of this year.
- Headline CPI picked up the pace, increasing by 0.6% month-on-month in October after a 0.2% increase in September.
- October’s reading is the best reading since April 2014.
- Also, this marks the second month of improving monthly readings after turning negative in June and July.
- The faster increase was mainly due to the price of food items increasing by 1.6%, which is much faster than the previous 0.7% increase.
- However, there were also increases in the price of furniture (+1.0% vs. -0.2% previous), transportation and communications (+0.1% vs. -0.8% previous), and culture and recreation (+0.9% vs. -1.1% previous).
- In fact, the increases in the above CPI components are also the reasons why both the core (headline less fresh food) and so called “core-core” readings (headline less food and energy) advanced by 0.2% each.
- Year-on-year, headline CPI increased by 0.1%.
- This is the first positive reading in seven months.
- The uptick was apparently due mainly to 2.3% jump in food prices (+0.6% previous).
- Food items are stripped from both the core and so-called “core-core” readings, but both readings were able to print an increase.
- This is due to the transportation and communications component being less of a drag (-1.7% vs. -2.1% previous) and the 1.0% increase in the cost of culture and recreation (+0.3% previous).
- In terms of trends, the core reading has been in negative territory on a year-on-year basis since March of this year.
- Meanwhile, the so-called “core-core” reading has been in positive territory since October 2013, with last month’s stagnant reading being the only exception.
Business Conditions & Sentiment
- The preliminary reading for Japan’s December manufacturing PMI from Markit-Nikkei improved from 51.3 to 51.9.
- December’s reading is a 10-month high to boot.
- Also, Japan’s manufacturing PMI has been above the 50.0 stagnation level for four months in a row already.
- The details of the PMI report also, er, reported a broad-based improvement, since production, new orders, exports and employment all increased at a faster rate.
- New work orders, in particular, rose “at the quickest pace since January.”
- Employment, meanwhile, saw the “rate of job creation picking up to a 32-month high.”
- As for Japan’s final November services PMI, it jumped from 50.5 to 51.8.
- This is also a 10-month high.
- According to commentary from the PMI report, “This was driven by a solid increase in new orders.”
- However, employment “remained in negative territory for the sixth consecutive month.”
- Moreover, “cost burdens rose at the sharpest rate in nearly two years, while charges broadly stabilised.”
- Additional commentary from the PMI report noted that “both the manufacturing and service sector suggests that GDP growth in the final quarter of 2016 will pick up. This is also backed by IHS Markit’s GDP forecast of 1.0% y/y in Q4 (the highest reading since Q3 2015).”
- Moving on, monthly industrial production flatlined in October after increasing by 0.6% previously.
- Industrial production has been deteriorating for two straight months after peaking at 1.3% back in August.
- On a year-on-year basis, industrial production contracted by 1.4% after two months of increase.
Consumer Sentiment & Spending
- Consumer confidence in Japan deteriorated for the second month in a row, falling from 42.3 to a six-month low of 40.9 in November.
- The slide in confidence was broad-based, with deterioration in overall livelihood (40.1 vs. 41.4 previous), income growth (40.4 vs. 41.0 previous) and employment (42.5 vs. 44.8 previous).
- Despite the fall in consumer confidence back in October, however, retail sales surged by 2.5% month-on-month in October.
- This is the biggest increase in 29 months.
- Year-on-year, however, retail sales fell by 0.1%.
- Still, October’s reading is an improvement over September’s 1.7% slump.
- Moreover, October’s decline is the smallest in 8 months.
- Total household spending in real terms (taking inflation into account), meanwhile, rebounded by 5.56% month-on-month.
- The rebound put an end to two straight months of declines.
- On a year-on-year basis, however, total household spending fell by 0.4%.
- Total household spending has been in negative territory for eight months in a row.
- On a more upbeat note, October’s reading is the smallest decline in six months.
- Japan’s seasonally-adjusted trade surplus widened to ¥472,276 billion in October.
- This is the biggest trade surplus since March 2011.
- The larger trade surplus was due to the 1.6% rebound in exports, although the 0.5% fall in imports helped as well.
- Year-on-year, however, exports continue to contract with the 10.3% contraction in October being the biggest in 3 months.
- On a year-on-year basis, exports have been in contracting for 13 straight months running.
- The drop in exports is softened a bit by the drop in imports.
- Imports have also been contracting for over a year on an annual basis, contracting by 16.5% in October.
Putting it all together
Quarter-on-quarter GDP growth continues to slow, but year-on-year GDP growth continues to accelerate. Not only that, Q3’s 1.2% annual growth is already above the BOJ’s 2016 forecast range of +0.8% to +1.0%. And things could potentially get even better in Q4, since total household spending recovered in October while the trade surplus in October was the biggest ever since March 2011.
Japan has a clear problem with inflation, however. And things currently don’t look very good on that front, since the BOJ expects core CPI to be within a range of -0.3% to -0.1% by the end of the year. However, core CPI came in at -0.4%, a tick lower than the BOJ’s lowest forecast. Looking forward, there’s a bright spot for inflation because the yen has been depreciating practically non-stop since the November U.S. elections. That would likely help to push up inflation into the BOJ’s forecast range.
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