Monthly Economic Review: Japan

Konnichiwa, forex friends! Pip Diddy noted in his Top Forex Market Movers of the Week ending on Nov. 27 that the Japanese yen was in demand. He attributed this to the lack of easing hints in the latest BOJ meeting minutes being taken as a positive sign by forex traders.

So, how is Japan’s economy doing lately? And are there any hints as to why BOJ officials are just shrugging off calls for more easing by analysts? Let’s take a look, shall we?

Growth

The preliminary estimate for Japan’s Q3 2015 GDP yielded a 0.8% year-on-year decline after the previous quarter’s 0.7% decline. Meanwhile, the quarter-on-quarter reading registered a 0.2% contraction, which is the second quarter of negative growth after Q2’s upwardly revised 0.2% contraction.

This means that the Japanese economy is now in a technical recession for the second time under Prime Minister Shinzo Abe’s watch. According to the GDP report, the main drags for quarter-on-quarter growth were the private inventory and business investment, which subtracted 0.5% and 0.3% respectively from GDP growth.

On a slightly happier note, exports increased by 2.6% after declining by 4.3% previously. Also, exports grew faster than imports (+1.7%), and the resulting net exports added 0.1% to GDP growth. Moving on, private consumption was pretty upbeat, too, since it grew by 0.5% after contracting by 0.6% in the previous quarter, allowing it to have a positive contribution of 0.3%.

Employment

The jobless rate for the October period unexpectedly dropped to 3.1% (3.4% previous), which is the lowest ever since July 1995. Woah! That’s great! That’s amazing! Except not really.

According the jobs report, the number of employed persons actually decreased a bit from 63,990K to 63,960K on a seasonally-adjusted basis, even though the number of unemployed persons dropped from 2,280K to 2,060K. Now consider that the labor force participation rate dropped from 60.2% to 59.9%. This most likely means that the lower jobless rate was due to people just giving up on looking for jobs altogether, which is pretty bad since that would probably have a negative effect on both consumer sentiment and consumer spending down the road.

Business Sentiment & Conditions

Industrial production in September increased by 1.1% month-on-month (-1.2% previous), but registered a decline of 0.8% year-on-year. This is the second consecutive month of declining annualized industrial production after it flattened out in July.

Also, the report from the Japanese Ministry of Economy, Trade and Industry shows that most industries suffered contracting industrial output on an annualized basis. This is probably why the Tankan manufacturing index, uh, tanked a bit (hehe) from 15.0 points to 12.0 points during the September period.

Looking forward, things look a little bit better, especially for Japanese manufacturers since Nikkei-Markit’s October manufacturing PMI reading jumped to 52.4 from 51.0 back in September. Production rising at “the fastest [rate] since February,” together with a “marked increase in new orders” were cited as the main reasons for the jump. The preliminary reading for Nikkei-Markit’s November manufacturing PMI promises even more sunshine, lollipops, and rainbows since it slightly increased further from 52.4 to 52.8.

Consumer Spending & Sentiment

The average Japanese consumer is still rather pessimistic since October’s consumer confidence index from Japan’s Cabinet Office is still below the 50.0 neutral mark. It did increase from 40.6 to 41.5, however, so it’s ain’t all that bad. According to the report, all sub-indices saw increases, but all sub-indices were also still below the 50.0 mark, with the “overall livelihood” component below the 40.0 mark at 39.6 (38.8 previous).

Moving on, household spending in October printed a 2.4% drop instead of flattening out as expected (-0.4% previous), which was a real disappointment to forex traders when it came out. The details of the report show that practically all components got torpedoed during the course of the year – only food (+0.8%), housing (+7.9%), and furniture & household utensils (+7.9%) were up. This implies that the Japanese people are only spending on the bare necessities – food and shelter. And the 0.9% decrease in income over the year probably helps to explain why.

Inflation

Headline inflation for the October period dipped by 0.1% (+0.1% previous) on a monthly basis while the year-on-year reading registered a 0.3% increase. Meanwhile, the annualized core reading (headline reading less fresh food) was down by 0.1% for the third straight month. However, the so-called “core-core” reading (headline less food and energy) was up by 0.7% (+0.9% previous) year-on-year.

For the newbie forex traders out there, do note that the sudden drop after March 2015 was due to an artificial boost from the consumption tax. Just subtract 2.0% from the readings for comparison purposes.

Summary & Conclusion

Overall, the Japanese economy is still in pretty bad shape and it’s now in a technical recession for the second time under Prime Minister Shinzo Abe’s watch, which is one of the main reasons why many forex traders and economists have been calling for more easing. Another major reason is the lack of improvement in core CPI.

Regarding GDP growth, BOJ officials expressed optimism in their October 30 meeting minutes, though they admitted to downgrading their projections for 2015 a bit due to “the flattening of exports and the sluggishness in private consumption.” But they were quick to add that their projections for 2016 and 2017 were essentially unchanged.

They predicate their continued optimism on the assumption that  ÃƒÂ¢Ã¢â€šÂ¬Ã…“emerging economies [will be] moving out of their deceleration phase” within the BOJ’s forecast period as well as a “virtuous cycle from income to spending being maintained in both the household and corporate sectors” as the main reason for their optimism.

However, industrial production has been rather lackluster, though Japanese business are still rather optimistic. Also, Japanese consumers are none too happy with the economy and their wages are down for year, too, which is probably why they’re mostly focusing on the essentials.

With regard to inflation, BOJ officials project that inflation will keep rising, as the decline in oil prices are gradually shaken off. And while core CPI has been somewhat subdued, BOJ officials pointed to the so-called “core-core” CPI, which has been in positive territory for the entire year (and since 2013), to show that the underlying trend in inflation is going strong, and I agree with the BOJ on that point, strangely enough.

Too long, didn’t read? Ouch! You hurt my feelings! The gist of it, though, is that  the underlying trend in CPI seems to have some basis, but the BOJ’s continued optimism on GDP growth does not. This could (or should?) weigh down the yen, but as Pip Diddy noted, monetary policy divergence seems to be in play.