Economic indicators deteriorate as industrial production and the labor market slows; inflation seems likely to fall back.
Japan’s economy has a high beta to the global cycle, and so it’s not surprising the economy has decelerated along with the deceleration in the global economy. However, even though the economy is a bit weaker, we don’t believe this is an early sign of a sharp downturn. Japanese industrial production fell at a faster rate than forecast in January; output dropped 6.8% month over month. While it rebounded to 4.1% in February, the data was below that of the Ministry of Economy, Trade and Industry (METI). METI’s survey-based forecast for March is 0.5%. If this output gain is realized, it would leave the first quarter 2.0% lower than the fourth quarter of 2017. Capital goods shipments fell 1.3% in February after declining 5.2% in January.
The aforementioned data is used to estimate capital investment in the national income accounts and suggests this component of GDP will be weaker in the first quarter compared with the fourth quarter. In the labor market, the unemployment rate rose to 2.5%, and the jobs-applicant ratio ticked down for the first time since 2012. The April Tankan (quarterly survey of business sentiment released by the Bank of Japan [BoJ]) edged up a little. The improvement was in smaller non-manufacturers; the indexes for large manufacturers and planned capex dropped. This was partially offset by planned capex increases by smaller firms. The data is consistent with a gentle turn in the cycle, not a sudden deceleration. The latest inflation data also disappointed, at least for the BoJ. The Tokyo core rate ticked down to 0.8% year over year in March from 0.9% in February. The recent appreciation of the yen has played a role.
Waiting on wages
The BoJ is less confident about the outlook than a couple of months ago. The inflation data was low, and the shunto (spring wage negotiations) in the labor market was disappointing. The typical wage increase at large firms was 0.64% this spring, the highest since 1998 and up from 0.48% in 2017. It was insufficient to change household income expectations. Companies may raise prices, and that will add a little bit of headline inflation into the pipeline.
There is still a possibility that there will be a policy adjustment later this year. However, we think this is quite unlikely. For the BoJ to change policy, the yen has to be significantly weaker or something dramatic has to happen in the labor market. While we can’t rule out a significant weakening in the yen, it doesn’t seem very likely.
Abe dodges a scandal bullet, but opponents are watching
Prime Minister Shinzo Abe is in the midst of a scandal involving a land deal where the government allegedly sold land at a below-market price to a school foundation. Abe’s wife was a director at the foundation. While Abe’s approval ratings have fallen, he is not under any immediate threat, or at least the immediate threat has passed. However, he will face a party leadership election in September. And, since the party leader is the prime minister, the election is central to Abe’s ambition to become Japan’s longest serving post-war leader. His party rivals will be eyeing opportunities to unseat him.
This is important because his opponents, and his successor if he loses the September vote, are less enthusiastic about Abenomics. A new leader may stir the BoJ on a less accommodative policy path. While the BoJ is legally independent, it would be naive to imagine the government has no ability to influence central BoJ policy. Abe is a committed reflationist, and he’s given support to BoJ governor Haruhiko Kuroda. The broader political support for this policy mix is eroding. If Abe loses power because of a scandal or some other development, his successor is not going to follow the same policy mix.
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