The first bits of post-Abenomics data are finally trickling in. And so far, it has to be said, it’s looking good for Shinzo Abe.
Lombard Street Research’s Michael Taylor takes us through the initial findings (our emphasis):
A recovery in industrial production and consumer spending points to above-trend growth in Q2. Consumer price inflation may soon make a brief appearance above zero on the back of higher energy and import prices. But deflation isn’t beaten yet. The splurge of Japanese data overnight confirms the overall positive trend in the economy. Notably, industrial production increased by 2% in the month of May, the fourth consecutive monthly increase. Output in May was boosted by electronic components and machinery in particular. Both industrial production and exports are now on an upward trend (see chart below). To a large extent this recovery is due to the weaker yen. Although the yen is above its recent lows against the US dollar, it is still 19% lower than last November.
As for inflation and consumer spending:
As the chart (above right) shows, the fall in the yen has coincided with an equity market rally. This, plus an increase in inflation expectations triggered by aggressive monetary ease from the Bank of Japan, is also helping to boost consumer spending. For May household spending data show a 0.1% monthly gain, while retail trade data were up by 1.5%. Both are on an upward trend and will support another quarter of fairly robust GDP growth in Q2. Meanwhile headline CPI inflation was -0.3% in May, up from -0.7% in April.
Higher energy prices are contributing to less deflation. Electricity prices are up 8.7% over the last 12 months, the fastest rate in over 30 years. Higher import prices as a consequence of the weaker yen may push national CPI inflation slightly above zero in coming months. But of course this would not herald the end of deflation as underlying pressures remain deflationary.
Meanwhile, Nomura suggests that on the back of this data core inflation of positive 0.4 per cent might even be possible in June:
May core CPI, which excludes fresh foods, recorded +0.0% y-o-y, accelerating from -0.4% y-o-y in April. June Tokyo core CPI inched up to +0.2% y-o-y from +0.1% y-o-y. Partly thanks to a decline in prices from April to June last year, we think core CPI inflation is likely to rise further in June, recording positive inflation. Our economists think +0.4% core inflation in June is possible, the highest inflation since November 2008 (see “June all-Japan core CPI may come in at +0.4%”, 28 June 2013). Even though the expected spike in June comes partly from technical factors, +0.4% y-o-y inflation could positively influence inflation expectations.
Though, the lingering question remains, at what cost has all this come? And to what degree is it Japan that rumbled everything else in the market?
One chart worth reiterating on that front is the following, courtesy of Bond Vigilantes:
And as Reuters noted on Thursday:
Japanese investors’ net selling of foreign bonds hit its highest level in 14 months last week as they continued to defy expectations Japan’s radical monetary policy to reflate its economy would lead to a flight of investment out of the country.
Meaning very loosely that Japan’s gain is increasingly the rest of the world’s loss.
Related links:
Japan’s open goal – FT Alphaville
Females and the crisis – FT Alphaville
Everyone’s scared of something – FT Alphaville
Alphachat podcast: Noah Smith on the Japanese economy – FT Alphaville