Upping the Pressure on the BOJ

Well today's economic news continues to pile on the pressure over at the BoJ:

Demand for services in Japan unexpectedly fell in May, suggesting waning consumer spending is slowing growth in the world's second-largest economy. The tertiary index, a gauge of money spent on phone calls, dining and shopping, dropped 0.1 percent after climbing a revised 1.6 percent in April, the Trade Ministry said today in Tokyo.

I'm not sure that this was entirely unexpected, especially in the light of the recent confidence index reading, and the trend downwards in wages in Japan.

All this makes me think that my view on the possibility of a BoJ rate rise in August may be excessively cautious. When I wrote this post last week, I though that it was maybe 40-60 that they would not raise, now I would bring that down to 50-50.

There are a number of reasons for this. In the first place, and as Bloomberg notes:

Japan's growth probably slowed in the second quarter as consumers, whose outlays account for more than half of the economy, reined in spending.

Now since the BoJ explicitly mention Q2 GDP as a key test, this will give them problems, although that doesn't mean that they can't change the story and carry on regardless.

But then there is this:

The Social Insurance Agency said in May that its mishandling of pension records could result in billions of yen in unpaid benefits. Bank of Japan Governor Toshihiko Fukui said last week that the pension issue and higher taxes might prompt consumers to spend less.

The pensions scandal has caused much more upheaval in Japan than most external commentators seem to recognise, and you need to remember that Japan is going to have elections later this month. Things don't look at all good for the LDP, and they look simply disastrous for Abe. So, as the IHT says:

Electoral defeat would not immediately threaten the ruling coalition's hold on power because it has a commanding majority in the lower house. But a loss would cause embarrassment and likely prompt party leaders to force Abe from office.


In other words electoral defeat would not immediately threaten the ruling coalition's hold on power, but it would shake things up a hell of a lot, and this will not go un-noticed over at the BoJ, which will certainly come under the accusation of having paid more attention to image maintenance at the G7 meets, and less to the real and perceived needs of the Japanese people.

Bank of Japan Governor Toshihiko Fukui seems to be living more in the ethereal than the real world right now, since he reportedly said last week that slower growth wouldn't decide the outcome of the bank's August policy meetin since ``Private consumption is solid, though by no means spectacular,'' (verbatim).

He is also holding fast to the opinion that "At present, there's no evidence these problems have had a negative effect"

According to a Japan government report out today "Japan's economy is 'recovering'. It remains to be seen for just how much longer this position remains sustainable.