Inflation At Highest Level Since 1997
Inflation in Japan, according to the general index, increased to 2.3% in July from 2% in June, thus clocking up the highest rate of price increases since October 1997, when prices rose by 2.5%.
The core CPI, which excludes volatile changes in fresh food prices increased by 2.4% year-on-year, and this index has now increased for 10 consecutive months. July's rise followed a 1.9% one in June.
Core "core inflation" - that is stripping out food (but not alchohol) and energy - was still only up a tiny 0.2% y-o-y, so this reading has only just poked its nose out of deflation territory, and may very easily hurry back into it if Japan really is in recession.
Core inflation in the Tokyo metropolitan area rose a preliminary 1.5% year-on-year in August (the Tokyo numbers are one month ahead of the rest), while the general CPI for the Tokyo area rose 1.3% in August, the biggest increase since March 1998.
Unemployment Falls
Separately, the Ministry of Internal Affairs and Communications said the unemployment rate in Japan eased to 4% in July from the two-year high of 4.3% in June, and it also came in below analyst expectations of 4.1%.
However, as unemployment fell, so did employment, and the number of people employed dropped back in July over June, falling from 64,510,000 to 64,060,000, or by about 450,000. Year on year employment was down 0.8% over July 2007. To understand why we have this dual phenomenon of falling employment and falling unemployment, you also need to think about Japans very special population dynamic, since the total population is both falling and ageing: thus the numbers of people in the "non labour force" category, which of course rose 540,000 in July over June, is on a secular rise.
The ratio of jobs available to applicants also fell for a sixth month to 0.89, the lowest level since October 2004.
Household Spending Down
Household spending fell back by an annual 0.5% in July (in real, price adjusted terms), leaving the average at JPY 298,366. July was the fifth straight month of spending decline, although incredibly the drop was under consensus analyst expectations, which were for a much sharper 1.8% fall, which had been the rate of decline registered in June. Overall household income was down 3.5% on year, with the income of household heads down 4.9%. Extraordinary income (ie bonuses) fell an annual 11% in July, while disposable income rose 3.9%.
And Wages Fall
Real wages were down in July falling at their fastest pace so far this year, putting even more pressure on household spending even as higher food and gasoline prices pressure the monthly buget. Japan's real wages index for total cash earnings fell 2.5% year on year in July, the fourth successive month of decline, according to Labor Ministry data.
Industrial Output Rises
Industrial production rose in July, and was up by 0.9 percent from June, when it fell 2.2 percent over May, according to data from the trade ministry said. The increase however wasn't enough to revise the government's assessment that output is weakening as export growth slows. On an annual basis, industrial production jumped 2%, although we should remember that July 2007 was a weak month for output due to the impact of an earthquake.
Overtime working hours among manufacturers, which correlate closely with industrial output, were down 4.9 percent in July, the most since March 2002.
Is The Recession Here?
Well despite the fact that IP went up, and undemployment went down, I would say that Japan is showing all the hallmarks of being in rcession, and we may well see further q-o-q contraction in Q3 2008. The Japanese government certainly consider this a real possibility and have announced plans to spend about 2 trillion yen ($18 billion) in an attempt to revive the economy. The initiatives include lower highway tolls, projects to help temporary workers find permanent tax cuts for low-income workers. But with debt to GDP now at 182% (according to the OECD) Japan really has very little room left for fiscal stimulus (and Claus will be coming in soon with an assessment of the implications of Fukeda's resignation).
Meanwhile consumer confidence is at its lowest level in at least 26 years, and I don't think we can see any immediate turnaround looming.
