Japanese CPI shows few signs of life

Emily Nicol
Chris Scicluna

Overview:
After US stocks moved broadly sideways yesterday (the S&P500 closed unchanged on the day), a number of Asian-Pacific markets also trod water today. Japan’s main indices were a case in point, with the Topix closing unchanged on the day as August inflation data predictably showed little signs of life (detail below). China’s CSI300 fared a little better, rising 0.3% as the PBoC somewhat disappointed, announcing that the new benchmark 1Y Loan Prime Rate (LPR) edged down just 5bps to 4.2% while the 5Y rate was unchanged at 4.85%. However, there was life in certain other markets – strikingly, Indian stocks rallied (the Nifty 50 is up about 4½%) as the government announced big corporate tax cuts.

While they were untroubled by the aforementioned inflation data, however, Japan’s bond markets were more eventful. After Governor Kuroda yesterday stated his desire for a steeper yield curve, the BoJ reduced its purchase amounts by a combined ¥50bn across three maturity buckets – the first time it’s lowered its Rinban purchases in three segments all at once. That action initially pushed yields on 10Y JGBs up a couple of bps to above -0.21%, although most of the move subsequently reversed, following UST yields lower (10Y yields fell more than 3bps to close to 1.76%). Euro area govvies, however, are little changed so far this morning.

In forex markets, sterling has appreciated to below 0.88/€ from close to 0.89 yesterday afternoon after a Sky News interview with Commission President Juncker yesterday suggested greater optimism that a Brexit deal with the UK could be reached to avoid a no-deal Brexit at end-October. According to him, "we can have a deal", and Juncker insisted that he was doing "everything to get a deal". Somewhat perturbingly perhaps, he added that he did not have "an erotic relation" to the Irish backstop which Johnson rejects.

Overall, however, all this suggests nothing new regarding the EU position. Indeed, we put the diplomatic niceties down to a concerted effort on the EU side not to be blamed if and when the talks eventually collapse. According to some accounts, a so-called “non-paper” sent to the Commission yesterday with supposed proposals from the UK Government offered little new compared to previous ideas mooted by Theresa May that were rejected completely out of hand. And while he is set today to meet Commission negotiator Michel Barnier for further talks, UK Brexit Secretary Barclay yesterday gave a wholly antagonistic speech in Spain, suggestive of an administration that is seeking to burn bridges with the EU and provoke a no-deal Brexit. We continue to see a very low probability that a deal will be reached with the EU and passed by the House of Commons and European Parliament in time to allow the UK to leave in an orderly manner at end-October.

Japan:
After the BoJ yesterday appeared more concerned about the subdued outlook for inflation, the data focus today was on Japan’s August CPI release. But while this showed that consumer prices rose for the first month in three (+0.1%M/M), the annual rate of headline CPI declined for the second successive month by 0.2ppt to 0.3%Y/Y, a six-month low. Admittedly, this principally reflected lower fresh food prices (-4.8%Y/Y). So, when excluding such items, the BoJ’s forecast measure of core CPI fell a more modest 0.1ppt to 0.5%Y/Y, nevertheless a two-year low. But when also excluding energy prices, the BoJ’s preferred core CPI was unchanged at 0.6%Y/Y, while the core measure excluding all food and energy – which aligns most closely with figures reported by other major economies – also moved sideways. Nevertheless, at 0.4%Y/Y it suggests that underlying inflation in Japan remains considerably weaker than its peers.

Within the detail, despite the recent yen appreciation, there was a surprising step up in non-energy industrial goods inflation in August, up 0.3ppt to 1.0%Y/Y, the strongest in more than three years. This reflected notable (but likely one-off) increases in prices of certain “durable goods assisting housework” (inflation of electric rice cookers rose 7.8ppts to 1.0%Y/Y and that of washer-dryers rose 9.2ppts to 16.5%Y/Y), while prices of clothing rose 0.3%Y/Y, the largest increase since the start of 2018. In contrast, services inflation eased to a ten-month low of 0.2%Y/Y on the back of lower hotel charges – an effect that we strongly expect to reverse throughout the period of the Rugby World Cup, which kicks off today.

Today’s revised labour earnings figures for July were also somewhat disappointing, suggesting that – contrary to the hopes of the BoJ – the tightness in the labour market is highly unlikely to generate upward price pressures anytime soon. Indeed, average wage growth was revised down by 0.7ppt to -1.0%Y/Y, the second-lowest reading for more than four years. While this in part reflected a steeper pace of decline in bonus payments (-3.3%Y/Y), the increase in regular wage growth was also revised lower to just 0.1%Y/Y. This, however, was a seven-month high. Meanwhile, based on a common sample, which should adjust for recent changes in technique, total wage growth was revised up by 0.1ppt, but remained very low by recent standards at -0.9%Y/Y. On this basis, regular wage growth was unrevised at 0.9%Y/Y, towards the top end of the recent wage. Overall, however, these data seem unlikely to get the pulse racing and won’t shift inflation onto a higher path.

So, while the jump in the oil price earlier this week on the back of supply concerns related to the weekend’s strike on a key Saudi oil facility might limit to some extent the likely downwards shift in energy price inflation, we expect the BoJ’s forecast core CPI measure to edge lower still over coming months, falling to just above zero percent in October when excluding the impact of the consumption tax hike. And while this might well represent the trough, we see only limited increases in core CPI thereafter.

Euro area:
The main data focus in the euro area today will be on the Commission’s flash consumer confidence indicator for September. The headline indicator has effectively trended sideways over the past six months. And while it fell a larger-than-expected 0.5pt in August to -7.1, that left it broadly in line with the average since the start of the year.

This morning has already seen the release of Germany’s PPI figures, which fell short of expectations in August and further supported our view that pipeline pressures remain very weak across the euro area. In particular, producer prices fell 0.5%M/M in August, to leave the annual rate down 0.8ppt to 0.3%Y/Y, a near-three-year low. Unsurprisingly, this principally reflected lower energy prices, which fell 0.3%Y/Y following a rise of more than 2%Y/Y previously. Indeed, when excluding energy, producer price inflation was down just 0.1ppt to 0.6%Y/Y, nevertheless still the lowest since October 2016.

US:
A quieter end to the week for US economic data releases will see the Fed publish the latest financial accounts figures for Q2.

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