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Economics – Markets – Strategy
Economics: Japan
To be sure, headline inflation of around 1% YoY (as Japan has been experiencing
so far this year) is still very modest by most standards. But this small number,
combined with flat wages, deteriorating job prospects and increased economic
uncertainty overall has severely knocked the wind out of consumer sentiment
(Chart 7).
Chart 7: Consumer confidence jumps off the cliff
Index, nsa
51
49
47
45
43
41
39
37
35
Latest: Apr08
C'ser confidence,
all h'holds
nationwide
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08
Chart 8: Faster inflation ahead
% YoY
6
5
4
3
2
1
0
-1
-2
-3
-4
Corp goods pxs
Corp service pxs
Headline CPI
Latest: Apr08;
CGPI May08
Jan-02 Jul-03 Jan-05 Jul-06 Jan-08
In the months ahead, sentiment - and hence actual spending data - are set to
worsen further, given the likelihood that inflation will accelerate. The slower
headline inflation reading of 0.8% YoY in April reflected a 15% drop in gasoline
prices nationwide, after the government failed to renew a tax bill that expired
on April 1. The tax was, however, reinstated in May, meaning the slower inflation
reading was temporary. Furthermore, judging by how quickly wholesale prices
(as measured by the corporate goods price index) have surged above consumer
prices, firms will probably have more price increments to pass on to consumers
further down the road (Chart 8). Assuming that inflation heads back above 1%
YoY for most of the remainder of the year, then inflation this year should average
1.1%, compared to zero price gains in 2007. ‘Core’ inflation will closely match
the headline, since it excludes only fresh food prices; last year core inflation was
also at 0%.
Not much relief on
the inflation front,
with CPI due to rise
1.1% this year
BOJ to stand pat, eye on inflation expectations
The outlook we have painted above clearly looks anaemic, and for the year we
expect overall GDP growth to slow to 1.6%, from 2% in 2007. In quarter-onquarter
terms, growth will average 0.3%. Against this backdrop, the BOJ will
have no room to lift its overnight call target rate of 0.50% this year.
Rates will be kept
on hold this year
That said, the trend remains for higher inflation, however mild. More importantly,
longer-term expectations of future inflation – which are what policymakers
ultimately strive to keep stable - are also on the rise, and BOJ officials would no
doubt be keeping a close eye on developments on that front.
In its last two quarterly Opinion Surveys, there has been a swing in the percentage
of respondents who believe prices will rise, particularly on a one-year horizon.
In 3Q07, 71.7% of respondents believed prices would go up either slightly or
significantly in a year’s time; in 4Q07 and 1Q08 this percentage rose to around
86% (Charts 9). On a five-year horizon, the increase was less marked, from 82%
in 3Q07 to almost 85% by 1Q08 (Chart 10). In terms of the level of inflation,
respondents went from looking for a median 3% annual inflation rate in 3Q07
(on a one-year horizon), to around 5% in the 4Q07 and 1Q08 surveys.
Inflation, and
inflation
expectations, are
rising
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