The week ahead: Japan - Nomura

Analysts at Nomura explained that for the week ahead, they forecast May all-Japan core CPI inflation to come in at 0.5% y-o-y as the rise in import costs stemming from JPY depreciation through end-2016 starts to have an impact.

Key Quotes:

"May all-Japan CPI (Friday): We forecast May all-Japan core CPI inflation (ex-fresh food) to come in at 0.5% y-o-y, stronger than the April reading of 0.3%. We think the main factor will be a boost to growth from the core core CPI component. We forecast May all-Japan core core CPI inflation (ex-energy and food, except alcoholic beverages) to come in at -0.1%, less than the 0.3% decline seen in April. May core core CPI inflation for the Tokyo area (already released) rose from April and we believe the all-Japan figure will follow this pattern. We also forecast all-Japan CPI inflation ex-fresh food and energy, commonly known as the BOJ's version of core core CPI, to come in at 0.1% y-o-y in May, versus 0.0% in April. We forecast Tokyo area core CPI inflation to come in at 0.2% y-o-y, up from 0.1% in May. We expect the rebound in energy prices to again boost the core CPI. Meanwhile, we forecast core core CPI inflation for June to be -0.1%, the same as in May. Looking back at May, we believe the rise in import prices due to JPY depreciation through end- 2016 has started to have an impact on the core core inflation rate. However, the rise in the core core inflation rate in May was sharp, and in June we expect the boost from JPY depreciation to end. We forecast Tokyo area CPI inflation ex-fresh food and energy (the BOJ version of core core CPI inflation) for June to be 0.1%, higher than the May reading of 0.0% owing to a small boost from core foods.

May industrial production (Friday): We forecast industrial production in May to fall 3.0% m-o-m. The survey of manufacturers' production forecasts calls for a fall of 2.5% m-o-m in May. Actual production tends to be lower than production plans, and adjusting this figure using realization ratios over the past three months gives a decline of 3.5%. Meanwhile, favourable data stood out in related statistics in May. Japan's real exports, which have a strong correlation to industrial production, were up 2.3% m-o-m. In addition, corporate sentiment improved, with the Japanese manufacturing PMI output index up 0.6 points from the April figure at 54.0, exceeding the growth/contraction threshold of 50. The current conditions DI for manufacturers in the Economy Watchers Survey (seasonally adjusted) was up 2.8 points month-on-month at 51.0. Based on these mixed results, we do not believe the decline in production will be as large as indicated by applying the past realization rate to production plans. 

May Labour Force Survey (Friday): We forecast an unemployment rate of 2.8% for May, flat month-on-month. The job openings-to-applicants ratio, which tends to lead the unemployment rate, has risen consistently since February, but we assume the current economy is close to full employment. We forecast a job openings-to-applicants ratio of 1.49x, up 0.01 points month-on-month. The new job openings-to-applicants ratio, which tends to lead the job openings-to-applicants ratio, has been flat since the start of 2017, and corporate appetite for hiring may have lost some of its momentum recently. However, we believe labour supply-demand is continuing to tighten due to the boost from improvements in the economy, and forecast that the job openings-to-applicants ratio for May to maintain moderate growth.

May Family Income and Expenditure Survey (all households) (Friday): We estimate that real household consumption expenditure (per household) will fall 1.4% y-o-y in May, but rise 0.3% m-o-m. In the Economy Watchers Survey for May, the household activityrelated current conditions DI (seasonally adjusted) fell 0.3 points as household sentiment as seen from the vendors’ standpoint deteriorated. Meanwhile, the Consumer Confidence Index for May was high at 43.6, an improvement of 0.4 points m-o-m. Furthermore, department store sales rose 0.6% m-o-m in May, reflecting strong spending by foreign visitors to Japan and strong sales of big-ticket items owing to JPY depreciation and high equity prices; new auto sales (passenger cars) marked further strong growth in May with a rise of 3.6% m-o-m (seasonally adjusted by Nomura). As such, despite the mixed results in terms of sentiment among vendors and consumers, in view of growth in other sales statistics, we forecast spending in May to increase monthon-month."