Playing the Waiting Game in Japan
As I reported a couple of days ago on Japan the next few days would see the release of a slew of economic indicators pointing forward to the future course from the BOJ in Q3 and Q4 (with the nature of the just released data I find it very unlikely that the BOJ will jump-start markets with a surprise raise in July). These 'few days' have now passed and we can now do some kind of status. I managed to slip in, as an update, the report on industrial production in my post linked above. Generally, the result was disappointing from the point of view of expectations and given the trajectory of the numbers (se graph by Edward here) I noted the following;
Now, the interesting thing is I think that it could look as if the Q4 2006 capex bonanza could take almost two thirds of 2007 to unwind, especially if the the US economy continues to 'under perform.' If this is the case, the data on domestic consumption will be very important indeed.
To respond to that we might want to check out the recent data on consumption in May (Bloomberg article on both the latest CPI release and consumption expenditures). As reported, household consumption rose 0.4% on a y-o-y basis which indeed extends the increasing throughout 2007 up until May. Yet, 0.4% is not much and compared to last month it marks a relative decline compared to April of 0.7%. In this way I will stick to my prediction stating that despite what many are calling the revival of domestic consumption in Japan it is unlikely that we will push above the 1% threshold on an average y-o-y basis. This goes especially if we use seasonally adjusted data as our primary gauge. The figure below plots monthly changes on a y-o-y basis in consumption expenditures since May 2006.
Turning to inflation prices held steady in May posting a 0.1% decline y-o-y which was the same as the previous month, so Japan is still in deflation it seems. Another somewhat important data point was the inflation figures (core prices) from Tokyo which posted a 0.1% decline in June, its first slide in three months. This does not bode well for nationwide inflation figures in June. The graph below plots (according to the tale of the three inflations) inflation in Japan on a y-o-y basis from May 2006 to May 2007.
So, what does all this mean? First of all I think it has cast serious doubts on the future course from the BOJ. Clearly, the July surprise hike which has been much debated is out of the question I think. Another thing which is politically related is the fact that Fukui is set to step down in March next year. Clearly, he wants to leave the best possible kind of conditions for his successor; the question obviously remains then, will that make him/the BOJ more or less hawkish? A hike in August or September cannot be ruled out just yet I think and much will depend, I think, on the continuous tightening of the labour market (unemployment is stable at 3.8% in May) and whether this will have an inflationary effect. Furthermore, there is of course the headline inflation rate which is set, after a dip in the latter part of 2006, to continue its structural upward trend. Turning to international FX markets the show thus seems set to go on with the Yen reaching new lows fuelling sizzling growth in among other countries New Zealand where a refi rate of 8% is acting like an over dimensioned Yen magnet. I don't condone complacency but at this point and with the current relative benign global economic conditions not pushing up inflation in Japan it is just completely impossible for me to see how the BOJ ever will be able to close the gap to a degree which would make the carry trade unwind. In fact as I have noted before, I believe it is more likely that any narrowing of the interest differential between Japan and the rest of the world will come through the lowering of interest rates elsewhere.