Japanese inflation underwhelms again

Emily Nicol
Chris Scicluna


After a better day for US stocks (the S&P500 closed up a little less than 0.4%), the tone in Asian markets was markedly improved today. The mood was boosted not least by the latest Fed-speak, with Vice Chair Clarida noting in a TV interview of the merits of adjusting monetary policy pre-emptively, while Vice Chair Williams (in a speech which the NY Fed nevertheless insisted was ‘academic’) made some similarly dovish noises. So, while the latest Japanese inflation data came in line with relatively subdued expectations (see detail below), the TOPIX closed up 1.9% on the day, not quite enough, however, to fully reverse Thursday’s drop. China’s CSI300, meanwhile, closed up 0.9%, with other main regional indices posting gains of similar magnitude.

With equities performing positively and the dollar having weakened, in fixed income markets USTs have today reversed some of their gains made in the immediate aftermath of the Williams and Clarida comments. As such 10Y yields are currently a little less than 2.05%, close to their levels this time yesterday. JGBs, however, made gains at the shorter end of the curve. And euro area govvies have made further gains this morning after reports yesterday suggested that the ECB might soon revise its inflation target, a move that might also be expected to justify more aggressive monetary easing, such as a new substantive programme of net asset purchases. In forex markets, sterling has given up only a little of yesterday’s gain achieved in the wake of stronger-than-expected UK retail sales figures and a move by the House of Commons to constrain significantly the ability of the next Prime Minister (who’ll be confirmed next week) to press for a no-deal Brexit.


Ahead of the BoJ’s policy-setting meeting at the end of this month when, among other things, the Bank will publish updated growth and inflation forecasts, focus today was on the June CPI figures. While these provided no major surprises, there was further evidence that underlying price pressures remain very subdued and are probably now on the wane.

Admittedly, consumer prices overall were unchanged on the month a seasonally-adjusted basis, to leave the annual headline inflation rate also unchanged at 0.7%Y/Y. But that’s less than half its peak reached last year. And with fresh food prices having jumped over the month, the BoJ’s forecast core measure (which excludes those items) fell for the second successive month by 0.1%M/M to push the respective annual rate down 0.2ppt to 0.6%Y/Y, a near-two year low. Stripping out energy too, the BoJ’s preferred core inflation measure was unchanged at an underwhelming 0.5%Y/Y. And excluding all food and energy prices, the core-core measure – which aligns most closely with figures reported by other major economies – remained at just 0.3%Y/Y. So, underlying inflation in Japan remains well below levels prevailing among its peers.

Within the detail, among the typically volatile items, upwards pressure from fresh food prices (up by 2.8%Y/Y, the most since September) was thus offset by energy inflation (down 2.5ppts to 1.2%Y/Y, the smallest increase since the start of 2017). That move in part reflected a fall in gasoline prices (with the 2.7%Y/Y drop the steepest since 2016), while the year-on-year increase in electricity prices (2.5%Y/Y) was the softest for a year. With two leading telecoms companies having introduced reduced mobile phone tariff plans in June, there was also a steeper pace of annual decline in mobile phone charges (-5.8%Y/Y). But this impact was in part offset by higher hotel prices, to leave services inflation up 0.1ppt to 0.4%Y/Y. In contrast, non-energy industrial goods inflation edged down 0.1ppt to 0.4%Y/Y.

Looking ahead, energy prices are likely to subtract from annual rates over the near term, with the effect of the lower oil price compounding the impact of a further cut in electricity tariffs at five of the ten major electrical power firms this month. So, a further decline in the BoJ’s forecast measure of core CPI to 0.5%Y/Y or below over coming months seems highly likely. And despite the anticipated step-up later this year on the back of the consumption tax hike – most of which will anyway be offset by the abolition of certain public school fees – we expect underlying inflationary pressures to remain very subdued for the foreseeable future. Nevertheless, given its usual tendency for excessive optimism, later this month the BoJ still seems highly unlikely to amend significantly its inflation forecast – currently at 1.1%Y/Y in FY19, 1.4%Y/Y in FY20 and 1.6%Y/Y in FY21 – although it will acknowledge again that core CPI is expected to remain persistently below target across the forecast horizon.

Today’s other notable Japanese data – all industry activity in May – added to evidence of positive growth in Q2. As expected, all industry activity rose 0.3%M/M in May following growth of 0.8%M/M in April, which was revised down slightly from the previous estimate. We already knew that industrial production rose 2.1%M/M – the most in fifteen months – but also that activity in the tertiary sector (which accounts for more than 70% of total output) dipped 0.2%M/M. Today’s release reported that construction had another decent month, with output in the sector rising 1.4%M/M in May, the fourth month out of the first five of the year to record growth of more than 1.0%M/M. Within the detail, both private and public sector construction activity rose, with a surge in civil engineering in the former category and stronger growth of building work in the latter. Overall, today’s figures showed that the average level of all industry activity in April and May was 0.6% above the average level in Q1, strongly suggesting positive growth over the second quarter as a whole. We caution, however, that these data provided an unreliable guide to economic growth in Q1, with the 0.4%Q/Q drop in all industry activity at the start of the year having contrasted with first-quarter growth of 0.6%Q/Q in GDP.

Euro area:

The week should end on a quiet note in the euro area, with the ECB’s balance of payments figures for May likely to show a widening in the current account surplus on the back of the improved goods trade position that month.


It should be a relatively uneventful end to the week for economic news from the UK, with the June public finances data the only notable release. While public sector net borrowing in April and May was up slightly on its levels in the same months last year, it was also on track to fall short of the OBR’s full-year forecast by roughly £1½bn, possibly implying scope for very modest fiscal loosening in the autumn budget. However, in their campaigns to succeed Theresa May as Prime Minister, both candidates – the populist favourite Boris Johnson and the underdog Jeremy Hunt – pledged substantive tax cuts and extra public spending with few indications of how it would paid for, implying extra borrowing of tens of billions of pounds each year. Of course, the health of the public finances will partly depend on what happens with respect to Brexit. A relatively conservative scenario published yesterday by the OBR in its “Fiscal Risks Report” suggested that annual net public borrowing would be around £30bn a year higher than its current baseline forecast from 2020-21 onwards.


In the US, the week will end with the preliminary University of Michigan consumer sentiment survey results for July, which are expected to report a modest improvement in confidence following a dip in June.

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