JPY: Ultimately the problem Japan has is with growth - BBH

Research Team at BBH, suggests that the Japan's deflation seems to be over-appreciated after last week, Japan reported that its core measure of consumer inflation (excluding fresh food) was minus 0.3% year-over-year and because it includes energy, it overstates the deflation.

Key Quotes

“Excluding food and energy, consumer prices have risen 0.7% from a year ago.  This is still well below target but is not deflation.  As we have noted before, due to structural rather than cyclical factors, rents in Japan are declining, and if they were excluded inflation in Japan would be closer to 1%. 

Ultimately the problem Japan has is with growth.  The first estimate of Q1 GDP at 1.7% (annualized pace) was surprisingly strong.  The capex figures due in the week ahead could give the doubters of the first estimate something upon which to hang their expectations of a downward revisions. 

Other data over the course of the week will likely show the economy has not begun the second quarter on strong footing.  An expected fall in industrial production is likely aggravated by supply chain disruptions following the recent earthquake.  A soft retail sales report is anticipated.  It is difficult to imagine significant improvement in the Japan's labor market.  The unemployment rate is expected to be unchanged at 3.2% compared with 12 and 24-month averages of 3.3% and 3.4% respectively. 

A key issue is not so much about the economic data as the policy response.  Earlier this year, there were expectations that Abe would look to postpone the sales tax increase.  Then Q1 GDP was stronger than expected and Finance Minister Aso indicated at the recent G7 finance ministers and central bankers meeting that Japan would push ahead with the retail sales increase from 8% to 10%.

The plot took another turn at the G7 heads of state summit.  Abe tried to get a rather dire warning of a Lehman-like event into the final statement.  This apparently was Abe's way of trying to get cover for delaying the tax.  The final statement recognized the world economy was slowing, but drew back from a Cassandra-like prognostication.

Nevertheless, local press reports over the weekend have signaled that the tax increase will, in fact, be delayed, perhaps into 2019.  The postponement of the tax increase (Abe's second delay) may be part of a larger fiscal package combining rebuilding from the earthquake to new economic stimulus.

Some reports suggest the overall fiscal effort may be in the area of the equivalent of $90 bln (JPY10 trillion).  Abe may confirm the delay in the middle of the week.  It is when the current parliamentary session ends.  The upper house election will be held this summer, and Abe has indicated he would formally make a decision before it.  There is a small chance that the decision to delay the tax increase would also see Abe dissolve the lower house as well and have a general election.  Meanwhile, the general stability in the dollar-yen rate reduces the perceived need to intervene, while the lack of G7 support raises the bar.”