Small things matter in terms of the Japanese economy and especially when it comes to the indicators for domestic demand and inflation. As such, the next couple of days will see important releases on the Japanese economy which, according to the forecasts, are going to come out on the positive side thus further bolstering the BOJ towards a potential hike in August or September. The first data point which suggests this comes from the figures for retail sales in May which rose an almight 0.1% from a year earlier and 0.3% from a month earlier. Now, as Bloomberg never tires of pointing out, retail sales tend to understate domestic consumption in Japan since it excludes purchases over the interenet as well as services. Particularly the latter is important in Japan. On the other hand, the trade ministry also noted a strong seasonal component in this reading as especially warm weather added to the increase through food and beverage sales. All in all though, past experience suggest that these retail figures should provide a solid ground for a positive monthly reading of domestic consumption in May. On the inflation front there is no data out until the 29th but already now there seems to be grounds for 'optimism', at least given Bloomberg's compiled forecast which note that the decline in consumer prices probably stayed at -0.1 in May. Anonther measure of inflation which also shows signs of an upward tick in the indirect measures of inflation such as producer prices and whole sale prices. However, do note this ...
Higher costs of energy and raw materials are driving up Japan's wholesale prices of goods as well as services. Producer prices climbed 2.2 percent in May from a year earlier, a 39th month of gains.
The central bank's overseas commodity index of 16 raw materials, including crude oil and copper, climbed 3.7 percent in May from a year earlier, a fourth monthly gain.
Inflation of course is inflation and this is particularly the case in Japan where the headline inflation is lumped together with the more traditional core inflation index (core of core) and then there is also company service prices which rose, so some upward pressure is clear there ...
Faster growth in the costs companies pay for services such as transportation and rent may prompt them to raise prices, sparking inflation. Central bank Governor Toshihiko Fukui has said consumer prices, which fell in April for a third month, will rise over the long term.
The big question still remains I think whether this is because activity in Japan's domestic market is picking up the pace to any significant degree. Finally in terms of economic indicators we should also be looking out for factory output figures which are released tomorrow. As with inflation the forecasts are fairly bullish and more importantly, as quoted by Bloomberg, this report will be an important indicator as to the future course of the BOJ in terms of raising in August or September.
As another almost regular sequence in my notes on Japan I feel the need to refer to Morgan Stanley's Takehiro Sato who also has note up on the outlook on the Japanese economy. One of the most notable things to watch out for in Sato's analysis is his account of why wage pressures in Japan are still somewhat distant even if we take into account that the labour market is very tight. Note particularly the structural factors in terms of part-time workers and how the wage curve remains tilted towards elderly workers. Add to this, Japan's continuous demographic decline which will only intensify (save potential migration) over the next couple of years it is difficult to see how wages can be pushed up to support consumption. In this way and although this might appear to represent the same capacity issues in for example Latvia compared to Japan are very different. As such, the rapid wage inflation spiral which are now seeing in Latvia as a result of an ultra tight labour market is very different from Japan where it is predominantly the relatively sluggish domestic demand component on the back of the high median age that are holding down inflation. In this way it is difficult to see how Japan, with its current growth rate in domestic demand in the middle of this very impressive global growth spurt, would be able to sustain the kind of inflation expectations we would normally expect in this kind of labour market environment. This of course is even more true if we factor in the BOJ which is clearly biased towards raising on the back of 'future' inflation expectations. My worry as it has always principally been with Japan is that this is like preparing for a party to which the guests will never arrive.
