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Japan Chart Book

Japan Chart Book

BoJ at the barricades

While inflation is still far lower in Japan than in most places, rapid increases in the prices of some everyday purchases have made it a political focus. A Nikkei poll following the Bank of Japan’s meeting at the end of last week found that nearly half of respondents thought that the BoJ should call a halt to ultra-loose policy. Another, more pressing challenge to Yield Curve Control (YCC) is coming from the bond market. The policy’s success in its first five years is indicated by the fact that the Bank was able to reduce its bond purchases substantially after YCC was introduced. But this month, as yields overseas have risen, the BoJ has been forced to buy more JGBs than ever before to keep yields within the target band. This pace of purchases cannot be sustained. Asia Drop-In (30th June, 09:00 BST/16:00 SGT): Are Asia’s central banks behind the curve? Can the Bank of Japan and People’s Bank of China continue to go against the grain? Find out in our special session on what global monetary tightening looks like in Asia. Register now.  

21 June 2022

Japan Chart Book

Tweak to Yield Curve Control still on the table

The Bank of Japan’s attempt to relieve pressure on the Yield Curve Control framework by offering to buy an unlimited amount of 10-year Japanese government bonds (JGBs) at yields of 0.25% for as long as necessary appears to have done the trick so far. Despite offering to do so every working day, the Bank hasn’t yet had to buy any bonds through the fixed rate method in May. The Bank’s latest confidence trick – along with the recent fall in global yields – has dissuaded the bond vigilantes for now. However, we think that the Bank will have to defend its ceiling with heavy purchases once again if – as we expect – US Treasury yields start rising again. And media reports suggests that some of the public are pinning blame on the BoJ for rising prices stemming from a weaker yen. As such, there’s still a good chance that the BoJ will ultimately decide to relieve pressure by widening its tolerance band on 10-year yields from the current ±0.25% to ±0.50% later this year.

23 May 2022

Japan Chart Book

Reopening could be a damp squib

With all domestic restrictions gone and the booster rollout further severing the link between cases and deaths, the conditions for a reopening bounce are in place. Moreover, consumers have ample room to splash the cash. The household savings rate remained far higher than in most other advanced economies at 9% in Q4. However, since the initial Omicron wave subsided timely data suggest that consumers are keeping their purse strings tight. While admittedly not the best guide to actual spending, Google data on the number of people at retail and recreation facilities show mobility not much higher than this time last year. And online restaurant views were still a huge 64% down on 2019 levels in the first week of April, hinting that face-to-face services spending hasn’t rebounded much yet. Add to those disappointing early signs the fact that the government hasn’t ruled out responding to future waves with yet more restrictions and the risks to our forecast for a cumulative 4% q/q rise in private consumption across Q2 and Q3 are firmly to the downside.

19 April 2022
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Japan Chart Book

Tightening would require wage growth of at least 2%

Governor Kuroda admitted last week that inflation could hit the Bank of Japan’s 2% target in April but stressed that “that in no way signifies there will be a revision of our current monetary policy”. Even if rising import costs cause inflation to overshoot 2% as we expect, a rate hike is off the table while domestic price pressures are non-existent. The Bank has repeatedly emphasised that it would need to see a significant pick-up in wage growth before there can be any talk of tightening. To be sure, our preferred measure of wages based on a continuous sample of firms currently shows base pay growth above its pre-pandemic average at 1% y/y. But while weak productivity growth in Japan probably ensures that wage growth is transmitted more directly to inflation than in other advanced economies, we think wage growth would still have to settle at least at 2% for a rate hike to be discussed. Even as the unemployment rate gets back at its pre-virus level of 2.4% by next year, we don’t expect that to be enough to lift wage growth any higher than an annual rate of 1%. Shielded by the lifetime employment system and weak unions, firms aren’t likely to come under any pressure to substantially increase their wage bill. Long Run Outlook Drop-In (23 March, 11:00 EDT/15:00 GMT): What will be the lasting impacts of the war in Ukraine? What legacies will the pandemic leave? What does a future of higher inflation mean for economies and markets? Neil Shearing hosts this special discussion with senior economists about the long-term investing outlook on Wednesday. Register here.

Japan Chart Book

Post-booster bounce in the spring

Services spending jumped to only 3% below its pre-virus level in Q4 2021 despite having begun the quarter on a weak footing with curfews still in place for bars and restaurants across many regions in October.  It will have been knocked back again this quarter by the Omicron surge and lackadaisical booster rollout – former-vaccine chief Kono Taro claims the initial rollout was so slow because he wasn’t there “to whip” the health ministry into action. But with daily cases now falling and the booster rollout finally hitting PM Kishida’s one-million-a-day target, services consumption is well set for a springy bounce next quarter that will pick up where Q4 left off. That may put services spending to within touching distance of pre-virus levels far earlier than most had expected before the release of the preliminary Q4 GDP data last week. And if – as we expect – the Go To Travel discounts are restarted next quarter, then that would give a further boost to the hard-hit face-to-face services sector.

Japan Chart Book

Hit to output from staff absences could be hard

Skyrocketing infections and a 10-day isolation requirement for close contacts of positive cases have resulted in a wave of staff absences in Japan. Domestic carmakers already struggling with chip shortages appear to have been among the first victims of strict isolation rules. Both Toyota and Honda were forced to close some production lines at the end of last week due to staff absences. Based on the National Institute of Infectious Disease’s analysis suggesting that each positive case has up to five close contacts, Nikkei estimates that 1.8 million people could be self-isolating by the end of the month. Assuming those in and out of the workforce are equally affected, that would translate into 1.3% of workers in Japan self-isolating. Despite a much lower caseload, that would be similar to staff absences in other advanced economies where we estimate that between 0.5% and 2% of workers are isolating. And with timely data provided by the Cabinet Office pointing to a surge in job vacancies at the end of the year, the wave of staff absences appears to be hitting just as firms are struggling to find new staff. Temporary hits to production from staff shortages will cause GDP to only tread water this quarter.

Japan Chart Book

Manufacturing rebound should continue into 2022

Q4 is shaping up to be strong in line with our forecast. Mobility data point to another sizeable rebound in consumer spending, and strong export data and optimistic firm forecasts suggest that industrial production has bounced back sharply. Full production reportedly resumed in the auto sector in December. And despite media reporting this week that Toyota is facing procurement delays for some chips, Japan’s premier carmaker is still expecting to produce 800,000 cars globally in January 2022 which would be 8% more than in January 2021. Provided auto suppliers inside Japan and abroad remain open through any Omicron waves, we expect manufacturing output to surpass its April peak early next year. We are assuming that PM Kishida won’t announce major domestic restrictions in response to any Omicron wave given early reports suggesting that the variant causes milder symptoms than Delta. All told, we think GDP will top up a 2.0% rebound in Q4 with a 1.3% q/q rise in Q1 2022 that would take it above its pre-pandemic level.

Japan Chart Book

Automobile sector set for swift rebound

While October’s trade data showed good exports still depressed by the recent collapse in domestic car production, there is growing anecdotal evidence that the auto sector is on the cusp of a rapid rebound. Toyota said that its global production in October was still 40% below normal, the same shortfall as in September. But production this month is likely to be only 15% below normal and higher than in the same month last year. In December, the company expects to produce a record one million cars globally, up 30% y/y in a bid to make up for lost ground. Nissan has similarly announced that it is ramping up production as supply shortages are dissipating fast. And Honda said today that it expects normal production to resume next month. Between them, these three firms account for more than half of vehicle sales in Japan. The collapse in domestic car production was caused by shortages of components from suppliers in Vietnam and elsewhere in Southeast Asia. But those suppliers’ factories are now getting back to full capacity. As such, most of Japan’s fall in goods exports and the sharp drop in durables consumption last quarter should reverse in Q4. Add in a sharp rebound in services spending due to the easing of domestic restrictions and GDP should rise by around 2.0% q/q this quarter after falling 0.8% q/q in Q3.

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