Economic Analysis: Japanese Data Could Pressure the Bank of Japan

On Friday, we are expecting a number of economic reports from Japan that might place pressure on the Bank of Japan (BOJ) to up its stimulus program. We are expecting this data to show that Japan’s economy remains mired in this soft patch following the consumption tax hike.

One of the key components being released is the core consumer price index. This excludes the volatile prices of fresh food. We are expecting it to come in at a 3.3 percent rise, annually. It would be a 1.3 percent rise if you excluded the tax increase. In other words, inflation remains way below the BOJ target of two percent. With inflation that is stagnant, investors are expecting BOJ Chief Haruhiko Kuroda to announce more stimulus to spur inflation higher. Over the last weekend, Kuroda said the BOJ, would remain committed to a dovish policy until inflation hit the target set. Further, he said it must be sustainable, maintainable and manageable.

The BOJ launched its aggressive easing program last April to end nearly twenty years of stagflation. They have stood pat on this policy since then. There is no reason to think they will change anytime soon.

Other data due on Friday include retail sales, household spending as well as industrial output. We are expecting these to also indicate weak consumer demand. We are expecting retail sail to move up a marginal 0.1 percent year on year in July. This comes after this number tanked 0.6 percent in June. We have seen a small improvement in consumer confidence over the last few months. Even though, nominal wages are still flat and real income continues to decline.

We are expecting household spending to decline three percent as it did in June. However industrial output might cast some sunshine on the economy. In June, it slid 3.4 percent. We are expecting it to increase by one percent in July. We are expecting this to be supported by a pickup in external demand. Particularly from Asia.

July economic data is likely to be soft but should not cause any distress from the BOJ. The bank is waiting to see how the economy does, overall or big picture, for the third quarter before making any moves with its policy stance. With that said, we are expecting the world’s third largest economy to normalize and return to growth in the third quarter. We are seeing a pickup in the labor market as well as industrial production. This should, in theory, support a growth in household (domestic) consumption.