Economic Analysis: Japan’s Inflation Misses the Mark

Today, we got a whole slew of economic data out of Japan, and as we expected the economy is showing a spotty recovery. Mainly thanks to April’s consumption tax hike.

Let us delve into the data. Household spending was off nearly six percent at 5.9 percent for July. This is an annual number. This was way more than the three percent expectation. We fell three percent in June. Retail sales was up a smidgen at 0.5 percent in July. We had expected 0.1 percent after losing 0.6 percent in June.

Nationwide CPI was up 3.3 percent in July. However, when you take away the tax increase, the number is at 1.3 percent. Well below the target set by the Bank of Japan (BOJ). The inflation we are seeing is from the tax increase and that is not desirable inflation. It is counterproductive. We are seeing an erosion of buying power. Which will effect recovery efforts. The inflation the BOJ wants is the underlying inflation from them convincing people there will be an inflation rate of two percent. The BOJ is working on expectations and this is way harder than an increasing number thanks to the tax increase.

It is very hard to get people out of the deflationary mindset. In this mode, they always feel they can get things cheaper should they want them. When consumers think inflation is here to stay, they will purchase now. That’s what they want and that is what the BOJ needs.

In other data, July’s unemployment rate remained at 3.8 percent. This was above the forecast of 3.7 percent and indicates slack in the labor market. We saw 3.7 percent in June. Industrial output was weak, rising 0.2 percent on the month. We missed expectations for one percent but was way better than the 3.4 percent falloff in June. Industrial production has been a sore point over the last few months even though the yen has been weak. We are seeing a weakened global demand even though the economy is recovering. Another problem here, is that Japanese firms want to produce closer to end demand. This means producing for overseas clients and not for the local consumer.

This weak data only adds to the pressure for the BOJ to do more to support their economy. Since beginning their unprecedented QE measures last year, they have done nothing more even as data shows a weakening economy. We saw the GDP contracting 6.8 percent in Q2. This was the largest contraction since Q1 of 2011. The BOJ is waiting on the big picture. Well, the big picture does not look that rosy.