The Week Ahead: Japan – An Accumulation of Concerns
Investors surveilling Japan’s economic landscape are set to receive updates on vehicle sales, consumer confidence and service sector activity, amid ongoing central bank accommodation.
Japan has been grappling with stubbornly low levels of inflation for almost three decades after the collapse of its economy in the early 1990s, while the Bank of Japan’s (BoJ) ongoing stimulus measures have been yielding little impact on prices.
At the release of its June monetary policy report, the BoJ elected to maintain its negative interest rate of -0.1%, as well as its purchases of Japanese government bonds (JGBs), exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).
The bank said it will also continue with its ‘Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,’ which it expects to continue “as long as it is necessary” for reaching and maintaining its 2% inflation target.
QQE was initially rolled-out in April 2013.
Furthermore, the BoJ is committed to expanding the monetary base until the year-on-year rate of increase in the consumer price index (CPI, ex-food costs) exceeds 2%. However, to date, this target seems far afield, as the bank’s ongoing efforts to strengthen its policy framework has had little effect on the inflation rate.
The nation’s CPI rose 0.7% year-on-year to 101.8 in May 2019, unchanged from the previous month.
Deleveraging Made Little Dent
Meanwhile, with the BoJ having established its negative interest rate policy (NIRP) at -0.1% since at least January 2016 from a previous 0.1% that persisted since December 2008 – in the wake of the housing crisis and credit crunch – non-financial corporate debt in the country has remained at relatively elevated levels.
According to the Bank for International Settlements (BIS), as a percentage of gross domestic product (GDP), Japan’s non-financial corporate debt resides at about 102.6% as of December 2018 from 106.1% ten years prior. The level is still roughly 28% higher than the U.S., but 2.4%, 15.5% and 53% lower than the Euro Area, Switzerland and Sweden, respectively.
The BIS places the country’s corporate debt at a total of around US$5.13trn at the end of December 2018 compared to about US$6.10trn at the end of 2008.
Cautious Consumers
Against this backdrop, while vehicle sales in the nation have inched up year-over-year in May 2019, confidence among consumers and household spending have both been recently facing downward momentum.
Marc Chandler, chief market strategist at Bannockburn Global Forex, noted Thursday that “Japanese businesses, alongside economists, are looking for signs that consumers are stepping up their purchases ahead of the sales tax hike planned for October 1.”
He said it is “not to be found” in May retail sales, which rose 0.3% compared with median expectations for 0.6% in the Bloomberg survey, and the April series was revised to -0.1 from flat. Chandler continued that year-over-year retail sales have risen 1.2%, the highest of the year, but the June 2018 monthly increase of 0.9% “makes for difficult comparison and warns the year-over-year pace will likely ease.”
Chandler also suspects that “the pressure that drove the dollar to around JPY106.80 earlier this week was fueled by Japanese investors raising hedge ratios on US-exposure ahead of the end of the month and quarter. The completion of this, coupled with the rise in US yields have helped the greenback poke through JPY108 for the first time in a week.”
Overall, the dollar has not been able to close above the 20-day moving average (~JPY108.10) since it peaked this year on April 24, with support seen near JPY107.60.
The yield on the 10-year U.S. government note was last bid at around 2.02%, while that of similar-maturity Japanese government debt was roughly -0.16%.
Japan’s Economic Calendar
Investors will receive several economic updates in the week ahead, which should provide additional insights into how Japan’s economic growth has been faring considering the escalating downside risks to the global economy.
The week gets underway Monday with reports on vehicle sales for June, as well as an update on consumer confidence.
Monday, July 1
- Vehicle Sales (June)
- Consumer Confidence (June)
Japanese vehicle sales rose 6.5% in May 2019 to 396,120 units, while sales from January to May grew 1.1% year-on-year to 2,303,022 units, according to MarkLines, citing data from the Japan Automotive Dealers Association and Japan Light Motor Vehicle and Motorcycle Association.
Vehicle purchases have picked-up modestly from April’s figures, which registered a year-on-year increase of 3.4% to 378,687 units.
Although vehicle sales in Japan lifted in May, consumer sentiment in the country has generally been waning, with the downbeat tone likely behind the recent lackluster retail purchase reports.
Japan’s Consumer Confidence Index (CCI) fell to 39.4 in May 2019 from the previous month, down 1.0 point, with all components having declined, including perceptions about overall livelihood, income growth, employment and willingness to buy durable goods. In the same year-ago month, the CCI was at 43.9.
While some Japanese company stocks have been benefiting by the stimulus the BoJ has been providing, global uncertainties, including escalating trade tensions between the U.S. and China, Brexit, geopolitical friction in the Middle East, and more recently, U.S. President Donald Trump’s commentary about his nation’s post-World War II security treaty with Japan, have generally been sending jitters into that country’s equity markets.
The iShares MSCI Japan ETF (NYSEARCA: EWJ), for example, which includes among its top holdings Toyota Motor Corp (NYSE: TM), SoftBank Group (OTCMKTS: SFTBY) and Sony Corp (NYSE: SNE), has only slightly recovered from its near 10% fall from October-December 2018. The ETF has risen by more than 11.25% from its most recent 52-week low set on December 24, 2018 – a positive return of about 1.25% since its peak at the start of October 2018.
Concerning Trends
The updates on vehicle sales and consumer confidence will be followed on Tuesday by a fresh gauge of service sector activity for June.
Tuesday, July 2
- Nikkei Japan Composite PMI (June)
- Nikkei Japan Services PMI (June)
According to Nikkei and IHS Markit, “Japan’s service sector continued to show signs of resilience during May, with business activity, new orders and employment all expanding. There were also signs of an improvement in overseas demand, with export sales rebounding. Business confidence, despite dipping slightly since April, remained stronger than seen on average over the survey history.”
The Business Activity Index posted 51.7 during May compared to 51.8 in April.
However, Joe Hayes, economist at IHS Markit, which compiles the survey, said that while “Japan’s services economy continued to tick along at a modest pace during May,” the current underlying trend in the nation’s economy is “disappointing and will certainly warrant concern” from Prime Minister Shinzō Abe, amid the upcoming upper house elections in July and the scheduled consumption tax hike later this year.
Hayes added that service sector panelists indicated “a degree of concern towards the sales tax increase, which pulled sentiment to its joint-lowest level in 18 months.”
Elsewhere, in the latter part of the week, when the U.S. markets will be closed in observance of the Independence Day holiday, investors will receive Japanese household consumption figures for May, following erratic spending patterns throughout the year.
Thursday, July 4
- Household Spending (May)
The average of monthly consumption expenditures per household for April 2019 was 301,136 yen, up 2.3% in nominal terms and up 1.3% in real terms from the previous year. This compares to a 2.1% year-on-year increase in real terms in the prior month.
Investors will likely be watching for any signs of further deterioration in Japan’s consumer confidence, ahead of elections and the consumption tax, for signals into Japan’s economic health and financial well-being.
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