Monthly Economic Review: Japan

Konnichiwa, forex friends! The BOJ introduced negative rates to its monetary policy arsenal, and forex traders responded by dumping the Japanese yen across the board. However, the BOJ did stress that the introduction of negative rates was a preemptive response to potential risks from further oil declines and slowing growth in emerging markets. And with that as a backdrop, let’s dive right into Japan’s underlying fundamentals.

Employment

Japan’s jobless rate held steady at 3.3% during December, which is good. But it gets even better because the labor force participation rate ticked higher to 59.5% after ticking lower to 59.4% previously.

In addition, the unadjusted number of employed persons increased from 63,580K to 64,030K whereas the number of unemployed persons only increased from 2,170K to 2,220K. This implies that the Japanese economy was able to absorb the influx of workers who decided to rejoin the labor market, which is great.

Business Sentiment & Conditions

The preliminary estimate for industrial production in Japan got torpedoed during the December period, printing a 1.4% month-on-month contraction (-0.9% previous), which translates to a 1.6% year-on-year decline. The annualized reading is even more disappointing since the previous month printed a 1.7% expansion. An overwhelming majority of industries reported a contraction in output during the December period. Also, exports may be adversely affected since the shipment index dropped 1.7% further after dropping 2.4% last month.

Despite the plunge in industrial output, the Tankan large manufacturing index held steady at 12.0 points during Q4 2015, but is forecasted to drop to 7.0 points by the end of Q1 2016. As for the Tankan large non-manufacturing index, it also held steady at a healthy 25.0 points, but is likewise expected to drop by the end of Q1 2016 to 18.0 points.

Looking forward, the Nikkei/Markit preliminary manufacturing PMI report for January posted a slight easing from 52.6 to 52.4. It’s still above the 50.0 neutral mark, though, so it’s still good. Anyhow, Markit economist Amy Brownbill commented that the downtick was mainly due to a slowdown in total new order growth, which was “mainly attributed to the domestic market, as international demand rose at a faster rate.”

Also, the PMI report noted that “input prices fell for the first time in over three years linked to the declines in raw material costs.” And on that note, let me just say that both the decline in input prices and the lower domestic demand will not bode well for Japanese inflation.

Consumer Spending & Sentiment

Japan’s Cabinet Office reported that the Consumer Confidence Survey for December ticked ever so slightly higher to 42.7 from 42.6. It’s still below the 50.0 mark, so the average Japanese consumer is a still pessimistic and not too “genki” on the Japanese economy. All four sub-indices are still below the 50.0 mark, but the downturn in industrial output probably affected most respondents since the employment sub-index slid down from 46.7 to 46.3.

The slight improvement in consumer sentiment did translate to a slightly less horrible deterioration in consumer spending, with retail sales for December contracting only by 0.2% month-on-month after a rather ghastly 2.5% drop during the previous month. It still looks bad on an annualized basis, though, given that retail sales was down 1.1%, which is the same downward pace as last time.

To make matters worse, household spending during the December period contracted by 4.4% when compared to the previous year. Not only that, household incomes also declined by 2.9% on an annualized basis while the “average propensity to consume” was down by 0.9%.

Inflation

Japan’s headline inflation for the December period was up by 0.2% year-on-year, which is slower than the 0.3% rise during the previous month. The core reading (headline less fresh food), meanwhile, held steady at 0.1% As for the so-called “core-core” reading (headline less food and energy) that the BOJ has been tracking, it ticked lower to 0.8% from 0.9%. The most noticeable change came from the housing component since it has been flat for the past four months prior to a 0.1% decline in December. Also, energy related components were still the main drags to inflation, but they’re slightly less of a drag when compared with the previous month since the energy index was only down by 11.0% whereas it was down by 11.1% previously.

Summary & Conclusion

Overall, the most recent data dump isn’t really that upbeat. In fact, the currently available economic reports are even pointing to a possible slowdown for Q4 2015 GDP. Moreover, the BOJ relies on a “virtuous cycle from income to spending operating in both the household and corporate sectors” in order to push up inflation, but household incomes and spending have been contracting on an annualized basis.

Given all the above and the BOJ’s recent easing moves (and promises to do more, if necessary), forex traders probably won’t be too eager to load up on the yen. But it has yet to be seen if the yen will continue to act as the safe-haven of choice for most forex traders, assuming risk aversion will make a comeback in the days to come.