It did not come as a big surprise that the BOJ chose to hold rates steady once again on the outlook on inflation which seems to be deteriorating somewhat. More gravely for Japan the healthy growth clip of private consumption expenditures recorded in February of 1.3% seems to have ebbed out already in March where consumption expenditures rose a mere 0.1% and although this is an increase not unlike the secular decline throughout 2006 it still begs the question of what actually the outlook is on this reversion in Japan's growth path and the outlook that the BOJ is going to normalize any time soon? Digging deeper into the figures makes for troublesome reading indeed ...
Industrial output continued its decline in March albeit ever so sligthly at -0.6% and with the Japanese trade surplus expanding at a record pace (74% expansion y-o-y in March!) on brisk demand from China I would expect industrial output or that is to say Japanese capex in general to perk up in the coming months although I might still be underestimating the amount capex ramped up in Q4 2006 but I do think that de-stocking will soon come to an end if China continues to thunder along. In terms of consumption expenditures I have already noted that they rose 0.1% but worryingly retail sales posted the sixth consecutive decline in March which of course generally brings into question those heeding the call of the return of the Japanese consumer as a 'big spender'. Below, the figures plot consumption expenditures in % change each month since March 2006 as well as on a seasonally adjusted real index (2005 =100). As we can see it is trending up from 2006 but just how much can we expect to see here with lingering deflation?
And now that we are talking about deflation the following figures plots the CPI index since March 2006. Of course, CPI indices in Japan is a reasearch project in itself but take a look at the CPI index excluding food and energy and tell me on what grounds the BOJ could and should normalize?
In Summary
I am at a loss to understand the recent bullishness on Japan in terms of how we stand before an imminent correction in Japan's growth path. Japan is indeed growing but still driven largely by exports it seems and the return to deflation and specifically the immediate outlook which points to a somewhat lingering nature does not exactly bode well for the future. Clearly consumer spending is trending upwards but hardly anything conclusive can be said at this point on whether we stand before an imminent boom. I remain cautious especially given the outlook on prices which may feed into expectations at some point. Also, if this is a period in Japan where bonuses are rising and where consumers should be spending a lot of money is this really what we can expect? What happens then when things return to normal? I am of course happy that things are looking better but at this point we are just not out of the woods and on that note it is pretty irresponsible to hail the coming of a Japanese consumption boom and of course as always ... anyone got that textbook definition of a sustainable recovery?
CV As ever, the weekly notes on Japan by Takehiro Sato over at Morgan Stanley follows mine quite nicely in terms of posting date (or more accurately perhaps my posts are following his?) and as such we also get the recent view on the outlook on Japan in the GEF edition this Friday.
As always, Sato's note is well worth a look as he sets out to discern the BOJ's recent report on the economic outlook.
Some of the risks regarding wages/prices and overseas economies cited in the previous October Outlook Report are emerging, but the April Outlook Report maintained the bullish scenario and forward-leaning stance on monetary policy. Overall, the Outlook Report is typically hawkish, but in the fine detail we also get a sense of some wavering on the part of the BoJ. Its statements on the management of monetary policy going forward, too, could be interpreted as a half-step retreat.
The median GDP growth forecast in the policy board’s F2008 outlook is almost unchanged at +2.1%, but the forecast for the core CPI inflation rate of +0.1% has been lowered more than expected from last October’s +0.5% following weak CPI results out the same day. Our impression is that this revision is too small (our forecast, after taking into account nationwide core data for March, is -0.1%), which means there is still some skepticism over the Bank’s outlook, but the downward revision itself was no surprise. The outlook for the economy and prices in F09, released for the first time, calls for steady economic growth of around 2% and relatively major improvement in prices of +0.5%. Under its forward-looking policy orientation adopted since the end of quantitative easing, the BoJ is keen to focus more on price rises to come than on weak price levels currently.
