Tuesday, August 5, 2014

Slow recovery in Japan

The latest slew of activity data out of Japan has done nothing to change my less than optimistic view of its near-term growth prospects.  Weaker than expected June month data suggests that in the second quarter the economy gave back all, if not more, of the front-loaded pre tax hike spend-up that delivered strong March quarter growth.

Retail spending is recovering but growth is well short of a solid recovery.  We think that reflects our long-held concern that the hit to real incomes from the tax hike and would act as a brake on a strong recovery.

After falling a seasonally adjusted 13.6% in April retail sales rose 4.6% in May, followed by 0.4% in June.  The annual rate of growth is now -0.6%.  On a quarterly basis sales fell 7.0% in the June quarter following a 3.9% increase in the first three months of the year.  That quarterly pattern is similar to that of the household survey of consumer spending indicating that private consumption will be a bigger drag on Q2 GDP than it was a boost to Q1.

Industrial production was also weaker than expected in June falling -3.3% in the month compared with consensus expectations of -1.2%.  Inventories are also on the rise which reflects the soft recovery in retail spending since the tax hike as well as the fact that export growth remains soft.  The production outlook was still relatively upbeat but needs stronger consumer spending and exports for those expectations to be fulfilled.

The other recent bit of news was the first increase in the unemployment rate in 10-months to 3.7% in June, up from 3.5% in May.  I’m not overly concerned about this; employment was relatively stable over the month with the rise in the unemployment rate due to a tick higher in participation.  A rising participation rate is a good thing.

Following GDP growth of +6.7% (qoq annualised) in the first quarter, I’ve got -6.5% penciled in for Q2 (date due for release August 13th), +2.5% for Q3 followed by a return to around trend at +1.5% in Q4.  That gives annual average growth of +1.1% for calendar 2014.

The Bank of Japan meets later this week.  They have been upbeat about how the economy would come thru the tax increase.  It’s unlikely they will have changed that view at this point, although their comments on the outlook for the economy will be interesting in light of the recent data.