Monthly Review: Any Signs of Improvement in Japan?

Japan’s latest data dump painted a mixed economic picture, with a few reports coming in line with expectations and others actually beating forecasts. Are we really seeing improvements in Japan and what could this mean for the yen’s forex trends? Let’s review this month’s set of figures to find out:

Inflation

In my previous article on Global Inflation Trends, I’ve mentioned that Japan seems to be lagging behind its peers when it comes to seeing a recovery in price levels. Keeping up with its weak inflation trend, the country’s core CPI reading just marked its seventh consecutive monthly decline for February, as the figure fell from 2.2% to 2.0%. In Tokyo, core CPI held steady at 2.2% for the third month in a row.

Minus the effect of the sales tax hike in April last year, the nationwide core CPI is actually flat for the month, reviving fears of another deflationary cycle taking hold in Japan. Leading indicators for inflation haven’t been so bad though, as producer prices printed a 0.5% uptick while the corporate services price index indicated an annualized 3.3% gain as expected.

Spending

Aside from anime and cosplay, weak spending is another popular trend in Japan these days, with the latest retail sales and household spending reports posting negative figures. Household spending is down 2.9% year-over-year in February while retail sales marked an annualized 1.8% drop for the same month.

While the headline figures spelled gloom and doom once more, comparing the latest figures to the previous ones reveal that improvements were seen. In January, household spending was down by a whopping 5.1% year-over-year while retail sales showed an annualized 2.0% decline. In addition, sales from large retailers chalked up a 1.3% gain for February, outpacing the consensus of a 0.7% gain.

Business Conditions

Although the BOJ has been confident about the rise in output, economic reports suggest that businesses are still struggling to get back on their feet. The flash manufacturing PMI for February fell from 51.6 to 50.4, reflecting a slowdown in industry expansion, while the BSI manufacturing index slumped from 8.1 to 2.4 for the current quarter.

Leading indicators are showing green shoots though, with the tertiary industry activity index showing a 1.4% gain versus the projected 0.6% uptick and the all industries activity index chalking up an impressive 1.9% increase.

Sentiment

Consumers and investors also seem to be hopeful that Japan could turn the corner pretty soon, as financial and economic confidence have improved recently. Bear in mind that a pickup in optimism tends to have a positive impact on spending and investments.

The consumer confidence index for February climbed from 39.1 to 40.7, surpassing the consensus at 39.9 and marking its third consecutive monthly increase. Meanwhile the Economy Watchers sentiment index jumped from 45.6 to 50.1, indicating a return to optimism after reflecting pessimism for the past seven months!

BOJ Policy Bias

No wonder the BOJ isn’t looking to ease monetary policy further! In their latest interest rate statement, central bank officials didn’t seem to be too concerned about the slowdown in inflation and spending, as they decided to zoom in on the potential impact of a corporate wage hike on economic activity.

Of course BOJ officials did admit that CPI could fall to zero in the coming months, but they also reiterated that underlying inflation trends remain strong. In addition, they noted that cheaper fuel costs could wind up encouraging consumers to spend their extra cash on other items, which should keep growth supported as well.