Was the Bank of Japan (BOJ) right to stand pat and refrain from making any monetary policy changes this month?
Let’s take a close look at Japan’s major economic indicators and see why the Kuroda and his gang might have to worry about the “R” word sooner than they think:
- Quarterly and annualized GDP revisions for Q4 2015 show slight upticks, but not enough to erase the overall grim picture for the economy.
- Revisions include upward adjustments to business spending, government spending, private non-residential investments, and exports while private consumption, residential investment, and imports went deeper in the red zone.
- Private consumption (60% of GDP) remains the biggest drag by shaving off 0.5% from the GDP while domestic demand also took out 0.4% from the GDP.
- Exports growth and business investment are still not making up for the loss from domestic demand.
- Unemployment rate ticked higher in February, but the details reveal a tightening labor market.
- A high level of job availability leaves room for employment opportunities and better employment rate.
- Tightening labor conditions is (very very) slowly translating into consumer spending.
- Low energy cost and weak consumption put a cap on consumer prices.
- Cost of food rose in February while transportation costs dropped at a slower pace.
- Tokyo core CPI showed 0.3% annualized decline in March, the biggest in three years. Will we see similar declines for the national figures?
- The BOJ wants corporate profits to grow to drive up wages and prices but low energy prices and a strong yen are dragging on consumer prices.
- Overall inflation is still waaay below the BOJ’s estimates and the latest numbers are only putting more pressure on the central bank to do more.
- Declining production and export demand dragged the manufacturing PMI into contraction (49.1) in March, its first since April last year and its fastest contraction since the tsunami in 2013.
- The slide in output was likely exaggerated by Toyota, Japan’s largest automaker, halting its production between February 8-13, 2016.
- Declines in export orders and production plans are becoming more evident, as a strong yen fuels the weakening international demand for Japan’s goods.
- The closely-watched Tankan surveys reveal less confidence among big manufacturers that Abenomics will work.
- Consumer confidence dropped to its lowest in 13 months with all of the survey’s components seeing declines.
- Confidence was affected by Toyota halting its production, concerns over domestic corporate performances, and China’s growth.
- Positive surprises in retail sales and household spending are taken with a grain of salt, as they may have been boosted by the extra day in February.
Trade and Housing
- Housing starts unexpectedly grew in February while construction orders declines for the second straight month.
- Japan clocked in its biggest trade surplus since September 2011 with trades with China and the U.S. improving and trades with Europe and the rest of Asia (where half of Japan’s exports go) slipping.
- Some analysts believe that the uptick from China’s trade is mostly due to the Lunar New Year-related demand.
Want a real snapshot of all those points above? Here’s a neat chart for ya!
What’s next for Japan?
After looking at the factors above, we can certainly understand why the BOJ would want to step up its efforts in stimulating activity in the economy. Though employment prospects continue to improve, the job opportunities just aren’t translating to economic confidence and activity.
The BOJ’s biggest concern is the self-fulfilling deflationary mindset where consumers and businesses expect inflation to remain subdued, which prevents businesses from investing and raising wages and consumers from spending their moolah.
The yen’s recent strength isn’t helping either, as it’s lowering import prices and making Japan’s exports more expensive. The former makes it harder for inflation to reach the BOJ’s 2.0% target while the latter makes Japan’s products less competitive in the already weakening global markets.
The plot thickens now that Q4 2015’s final growth numbers are out. More specifically, whispers of “recession” are getting louder in the forex grapevine. And why not? This year’s production, consumption, and trade numbers aren’t faring much better than in Q4 2015. If we see another negative growth in Q1 2016, then the world’s third largest economy would see its FOURTH technical recession in five years. Yikes!
What would you do if you’re one of them BOJ policymakers? Will you unleash more stimulus in the markets? Deepen the negative interest rates? Support a delay in consumption tax? Or do you have other ideas that you think could help? Don’t hesitate to share your ideas!