Flemming J. Nielsen
Danske Bank A/S
CPI excluding fresh food in December eased to 2.5% y/y (consensus: 2.6% y/y, DBM: 2.5% y/y) driven largely by lower energy prices. CPI excluding Food & Energy in December was unchanged at 2.1% y/y (consensus: 2.1% y/y, 2.1% y/y). CPI excluding fresh food and adjusted for the consumption tax hike in April last year (the measure the Bank of Japan (BoJ) targets) eased to 0.5% y/y from 0.7% y/y in November. We expect this measure for inflation to ease further to 0.3% y/y in January and 0.2% y/y February before starting to bottom out (obviously depending on the development in crude oil prices).
Industrial production in December rebounded 1.0% m/m on the back of a 0.5% m/m on the back of a 0.5% m/m drop previously. The production plans released for January and February were relatively strong. Based on these, we now forecast that industrial production will increase 4.0% m/m in February before contracting 2.4% m/m in February. Industrial production paints a relatively clear recovery picture for Q3 14: -1.9% q/q Q4 14: +1.7% q/q Q1 15 (forecast): 2.3% q/q.
The labour market data for December released overnight was stronger than expected. The unemployment rate in December declined to 3.4% (consensus: 3.5%, DBM: 3.5%) from 3.5%. This is the lowest unemployment rate since 1997. The job-toapplicant ratio (probably a better measure of labour market conditions) improved markedly to 1.15 from 1.12. This is the highest level for the job-to-applicant ratio since 1992. Hence, we currently have a tight labour market in Japan and this gives some hope that wage growth will start to accelerate more substantially in 2015.
Based on December data we have revised our forecast for GDP growth in Q4 14 marginally down to 0.5% q/q after a 0.5% contraction in Q3 14. For Q1 14, we expect GDP growth to expand 0.6% q/q.
We do not expect the BoJ to respond with more easing in the coming months despite our expectations of continued decline in inflation in the coming months. The message from the BoJ at its previous meeting is that it can accept a temporary decline in headline inflation as long as the economy continues to recover and inflation expectations do not decline substantially.
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