Suga in pole position to become Japan's new PM

Chris Scicluna
Emily Nicol

Suga in pole position to become new PM:
After a meeting today of the General Council of Japan’s ruling Liberal Democratic Party (LDP), Chief Cabinet Secretary Yoshihide Suga looks to be firm favourite to succeed Shinzo Abe as Prime Minister. In particular, the LDP leadership agreed to select the ‘emergency’ election process, which will give more weight to Diet members of the party (394 votes) than prefectural party members (three votes per federation, equating to 141 votes). Had the normal electoral process, which grants equal weight to lawmakers and prefectural representatives, been selected, Abe’s long-standing rival Ishiba might have been in pole position. However, given the simplified approach, and having reportedly received the backing of two of the largest factions of MPs – those led by Deputy PM Taro Aso and LDP Secretary General Toshihiro Nikai – Suga clearly now has the upper hand.

With Suga having held the Chief Cabinet Secretary role since Abe became PM in December 2012 (and hence become the longest ever holder of that role), he would very much represent continuity of policy if and when he wins the top job. A decision is likely to be taken tomorrow to confirm that the LDP leadership vote will be held on 14 (or 15) September, with the victor then expected to be confirmed as PM by the Diet just a few days later. Among other possible contenders, former Foreign Minister Fumio Kishida has confirmed that he will also enter the contest to succeed Abe. But it is currently unclear whether Defence Minister Taro Kono, who had also been expected to be a contender, will run. And at this stage, neither looks likely to overtake Suga in the pecking order.

Japan’s labour market appeared weaker in July:
As far as data are concerned, a key focus in Japan today was on the labour market with the release of the household-based Labour Force Survey for July. Total employment rose an estimated 110k, thus increasing slightly for a third straight month following the 1.1m slump recorded back in April. However, with the labour force growing by a somewhat-larger 160k, the unemployment rate edged back up 0.1ppt to 2.9%, thus returning to that seen in May. Of course, that level is still very low compared with other major economies and the 5½% peak seen during the global financial crisis, and partly reflects the success of the government’s employment adjustment subsidy programme. However, the weakening trend is still a concern. Indeed, separately, data from the MHLW revealed that the job-to-applicant ratio fell a further 0.3ppt to 1.08 in July – a level last seen in April 2014. While the number of job offers rose 2.5%M/M – the first increase since May 2019 – the level remained down 27.7%Y/Y. Equally ominously, the number of new job offers fell 4.9%M/M in July to be down 28.6%Y/Y.

MoF’s corporate survey suggests Japan’s GDP contracted in Q2 by more than first reported:
In other news, the MoF released the results of its quarterly survey of company performance, in this case pertaining to Q2. As usual, most interest centred on firms’ capex, which will provide an input into the national accounts revisions that will be released on 8 September. Unfortunately the survey reported a 6.7%Q/Q slump in investment in plant and equipment (excluding software), so that spending was down 10.4%Y/Y, the steepest annual drop since Q311. This result was much worse than market expectations and suggests that non-residential investment likely declined by more than the relatively modest 1.5%Q/Q fall that was first estimated in the preliminary national accounts.

Elsewhere in the survey, sales were estimated to have fallen 10.7%Q/Q in Q2, led by a 14.4%Q/Q decline in the manufacturing sector. Ordinary profits fell 29.7%Q/Q, while operating profits slumped an even greater 45%Q/Q with profits in the manufacturing sector down no less than 75%Q/Q. Meanwhile, perhaps not surprisingly, firms increased their short-term borrowings by 20.8%Y/Y, which, combined with slumping sales, helped lift firms’ liquidity ratio to the highest seen since figures were first collected almost two decades ago.

Japanese IP rebounds strongly in July but retail sales disappoint:
Briefly recapping the plethora of economic reports released in Japan on Monday, of particular note was the preliminary IP report for July. Despite the disruption caused by flooding that month, overall output rose a much greater-than-expected 8.0%M/M – driven strongly by a further rebound in the production of durable consumer goods – thus building on a modest 1.9%M/M increase in June. Nonetheless, given the collapse recorded in the preceding months, output was still down a huge 16.1%Y/Y. Shipments rose 6.0%M/M (down 17.1%Y/Y), while inventories fell 1.6%M/M (4.9%Y/Y).

Encouragingly, METI’s survey of manufacturers revealed that respondents expect a further lift in output over the August (4.0%M/M) and September (1.9%M/M). If these forecasts were to prove accurate, this would result in a 12%Q/Q rebound in IP in Q3, albeit failing to reverse the 16.9%Q/Q slump experienced in Q2. Given the usual over-optimistic bias evident in this survey, the actual rebound is likely to prove somewhat more restrained. Certainly, today’s Jibun manufacturing PMI offered little to support a continued surge in the sector, with the headline index revised up 0.6pt to a final reading of 47.2 in August – a six-month high and up 2.0pts from July. The output component was similarly almost 2pts higher on the month at 45.8, nevertheless still almost 2½ pts below the peak earlier in the year. 

In other news, yesterday METI reported a 3.3%M/M decline in retail sales in July following the sharp 13.1%M/M rebound in sales reported in June. As a result, spending was still more than 4% lower than the pre-pandemic peak and down 2.8%Y/Y, comparing unfavourably with the 1.3%Y/Y decline reported in June. Meanwhile the Cabinet Office’s consumer confidence survey reported a 0.2pt dip in the headline confidence index to 29.3 in August, led by greater pessimism regarding the employment situation, thus leaving the headline index almost 10pts weaker than it had begun the year, with the employment index 20pts lower. Housing starts fell 11.4%Y/Y in July, representing only a modest improvement compared with the 12.8%Y/Y decline reported in June. However, construction orders fell 22.9%Y/Y – a result that would have been worse had government orders not increased 37.7%Y/Y. Private orders in the manufacturing sector fell 39.4%Y/Y, whereas those in the non-manufacturing sector fell 28.0%Y/Y.

Chinese PMIs offer mixed messages:
The only data release in China today was the Caixin manufacturing PMI, which reported an unexpected 0.3pt improvement to 53.1 in August – the highest reading since January 2011. Both the output and new orders indices also rose to more than 9-year highs. By contrast, yesterday the official manufacturing PMI was reported to have declined 0.1pt to 51.1 in August, providing a moderate disappointment to the market. However, more encouragingly, the new orders index rose 0.3pt to 52.0 and the new export orders index rose 0.7pt to 49.1. Meanwhile, the non-manufacturing PMI rose an unexpected 1.0pt to a near three-year high of 55.2. As a result the composite PMI advanced 0.4pt to 54.5 – the best reading since May 2018, and consistent with other indicators pointing to a further rebound in China’s economy in Q3.

RBA increases size of Term Funding Facility:
As widely expected, at its meeting today the RBA’s Board decided to retain its key policy settings i.e. the targets for the cash rate and the yield on 3-year government bonds of 0.25%. Of greater interest, to continue to support those settings, the Bank announced that it had decided to increase the size of the Term Funding Facility and make the facility available for longer. Under the expanded Term Funding Facility, authorised deposit-taking institutions (ADIs) will have access to additional funding, equivalent to 2% of their outstanding credit, at a fixed rate of 25bps for three years. ADIs will be able to draw on this extra funding up until the end of June 2021 (the window for drawings under the initial allowance of 3% of outstanding credit closes at the end of this month). Additional allowances associated with an ADI's growth of business credit will be available until the end of June 2021.

The statement accompanying the decision said that an uneven global economic recovery is under way, with growth viewed as “relatively strong” in China, but cautioned that the future path of that recovery is highly dependent on containment of the virus. Domestically, the RBA continued to assess that the downturn is not as severe as earlier expected and that a recovery is now under way in most of the country (Victoria being the obvious exception). Looking ahead, the Bank still expects that the recovery will likely be “both uneven and bumpy”. In its central scenario, the Bank still expects the unemployment rate to rise to around 10% later in 2020, from 7.5% most recently, and then decline gradually to around 7% in two years' time. Similarly, inflation is expected to average between 1 and 1½% over the next couple of years.

Given that unchanged central outlook, the Bank reiterated that the bond yield target will remain in place until progress is being made towards the goals for full employment and inflation, and that further bond purchases will be undertaken “as necessary” to support that target. Similarly, the Bank repeated that it will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

Look ahead to tomorrow’s Aussie Q2 GDP release:
On the data front, ahead of the release of the full national accounts for Q2, the ABS reported that net exports had likely contributed 1.0ppt to quarterly real GDP growth, with the current account surplus almost doubling to a record A$17.7bn as imports slumped by more than exports during the quarter. In other news, the ABS reported that real government spending made a contribution to GDP growth of 0.6ppt in Q2, with general government consumption rising 2.9%Q/Q and general government capex up an even greater 3.6%Q/Q. Unfortunately, on Monday the ABS had reported an 8.6%Q/Q decline in manufacturing sales and a 3.0%Q/Q decline in inventories. So with the volume of retail sales and private capex down 3.4%Q/Q and 8.2%Q/Q respectively, tomorrow’s national accounts are sure to report a huge contraction in GDP (Bloomberg’s survey suggests a decline in the order of 6%Q/Q).

Other Aussie data releases:
Rounding out today’s Australian data, the Corelogic house price index fell 0.5%M/M in August – a fourth consecutive decline. However, doubtless boosted by record low interest rates, the number of dwelling approvals rebounded 12.0%M/M in July (now up 6.3%Y/Y), with private house approvals rising 8.5%M/M and 5.6%Y/Y. Meanwhile, the CBA Manufacturing PMI was revised down 0.3pts from its flash reading to 53.6 – now down 0.4pts from the final reading for July but still near the upper end of the range seen over the past couple of years. Finally, yesterday the RBA reported that private sector credit fell 0.1%M/M in July – a 3rd consecutive decline – lowering annual growth to a 7-month low of 2.4%Y/Y. While loans for housing loans 0.2%M/M, business lending fell 0.6%M/M.

Euro area inflation expected to fall back:
Focus in the euro area today will turn to the aggregate flash CPI estimate for August. Last Friday’s French data and yesterday’s Italian figures more than reversed the jump seen in July as the delayed start summer sales weighed on inflation. But figures from Germany yesterday also fell short of expectations, with headline inflation slipping into negative territory (-0.1%Y/Y) for the first time since May 2016. As such, euro area CPI seems likely to have more than reversed the uptick seen in July, with risks to our forecast of a 0.3ppt drop to 0.1%Y/Y skewed to the downside too. And core inflation is likely to have fallen by at least 0.4ppt to 0.8%Y/Y or below – indeed, the Italian harmonised core CPI rate fell 1.4ppts to 0.5%Y/Y.

This morning will also bring euro area unemployment figures for July, which despite the various government job support schemes, are expected to show that the headline rate edged up to 8.0%, its highest for more than 2½ years. And national car registration figures for this month from France, Italy and Spain are all due to be published too. We will also see the release of the final manufacturing PMI surveys from the euro area and member states, for which the preliminary release showed the headline euro area index move broadly sideways in August, while the output component edged slightly higher.

UK manufacturing PMI to point to ongoing recovery:
The final UK manufacturing PMI for August will also be published today. The flash estimate pointed to ongoing solid production growth last month, with the headline index rising 2pts to 55.3 and the output component up 2.2pts to 61.6, a more than six-year high. This morning will also bring the BoE’s latest bank lending figures for July. These are likely to show that demand for loans from SMEs remained strong, while lending to larger firms likely continued to stabilise. And although mortgage lending might report a further uptick as the backlog of applications during the lockdown continued to clear, consumer credit growth likely remained very subdued.

Look ahead to US data:
In the US, today will bring the manufacturing ISM for August, which is expected to show that the headline index moved broadly sideways (from 54.2 in July) signalling ongoing expansion in the sector. Construction spending figures for July and vehicles sales numbers for August are also due for release. Also of note, FOMC member Lael Brainard is scheduled to speak on the Fed’s new monetary policy framework. 

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