Japan: a two-sided economy

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Please note that this article may contain technical language. For this reason, it is not recommended to readers without professional investment experience.

In one aspect, Japan is somewhat comparable to the US: conditions in the labour market are tight, but wages are not rising. The official unemployment rate was only 2.8% in April, the lowest since 1994. To find a time when the jobs-to-applicants ratio was as low as it is today in Japan we have to go back to the 1970s.

However, total wages were unchanged in April from a year earlier and real wages even fell by 0.2%. This does not mean that the consumer has no spending power, because employment is increasing.

Exhibit 1: Japan: a lack of wage growth, despite low unemployment


Source: Bloomberg, BNP Paribas Asset Management, as of 06/07/2017

Domestic demand still looks rather shaky, especially consumption

In the first quarter of 2017, the Japanese economy grew by a strong 2.2% QoQ annualised. It was also the first time since the Great Recession that the Japanese economy had grown for five straight quarters. Even though consumption growth was reasonable, there is a dichotomy between the export-oriented manufacturing part of the economy which has done well lately and the domestic consumption part of the economy, which has lagged. Moreover, industrial output was less solid than expected early in the second quarter.

Still, by Japanese measures the growth outlook looks reasonably positive. The level of inflation however remains low. Headline inflation was 0.4% in April, but the core CPI slipped into deflation in March and stood at -0.3% YoY in April.

Exhibit 2: In Japan the rate of inflation is far below the target of 2%


Source: Bloomberg, BNP Paribas Asset Management, as of 06/07/2017

So, we foresee no imminent change to monetary policy. The Bank of Japan (BoJ) has moved from pure quantitative easing to a 0% target for the 10-year government bond yield. Officially it still targets annual asset purchases of JPY 80 trillion, but in practice the BoJ is flexible and buys whatever is needed to achieve its yield target.

Written on 06/07/2017

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