How are the latest releases of Japan’s economic numbers suggesting about the direction of the overall economy in Japan?

The Japanese government, through the Ministry of Trade, has released several economic figures, including the latest consumer price index (CPI) figures, household spending industrial production, and unemployment figures, all for the month of October and November 2013. Some of the data releases stood out the most in terms of the measurement of policy-making success included the core CPI numbers which rose to 0.90 percent during the month of October 2013, and increase from the 0.70 percent number during the same time last year, or approximately 28.6 percent increase year-on-year (yoy). The core CPI numbers are calculated based on prices, excluding food and energy, and is the exact methodology used to calculate the core CPI data in the United States. The core CPI figure forms a key barometer for the Bank of Japan (BOJ) overall inflation target of 2.0 percent. Earlier this week, the final minutes of BOJ’s latest October 31, 2013 meeting indicated that Governor Haruhiko Kuroda and his colleagues have discussed and came into a conclusion that the overall inflation target will be continuously monitored, and is expected that the 2.0 percent inflation goal will probably be achieved during the second half of fiscal year 2015, which is the beginning of April during the calendar year.

The latest inflation data has also pointed some hits as the three-pronged reforms framework including fiscal, monetary, and structural reforms, all commonly known as ‘Abenomics’ continues to show some progress. The structural aspect is still in question, but the fiscal and monetary reforms are said to be showing some meaningful progress. Japan has been mired with several decades of functioning under disinflationary conditions. With the expected introduction of the consumption tax increases from the current 5.0 percent to 8.0 percent by April 2014, and 10.0 percent in October 2015, references obtained from Bloomberg News indicated that stripping out these consumption tax increases, the median forecast of BOJ board members was for prices to rise 1.3 percent in 2014, and 1.9 percent in 2015, which is close to the 2.0 percent official BOJ forecast for its inflation target to be achieved by the second half of 2015. However, many members within the BOJ including board member, Mr. Takahide Kiuchi, and Mr.Kuroda have both suggested that the current inflation target could be a ‘tall order’, ‘ambitious’ that could be achieved by the indicative timeline during the second half of 2015.

There are other economic figures that should not be ignored, including the latest industrial production figures for the month of October 2013 showing a decline to 0.50 percent, which was less than the expected forecasts of 2.00 percent, and 1.55 percent during the August to September 2013 period. The less than expected industrial production number was probably due to the result of seasonal effects, as statements from the Trade Ministry indicated that policy makers continued to expect that industrial output will rise during the month of November and December 2013 as the year-end season starts kicking in. Household spending and unemployment figures remained relatively unchanged which suggests that consumption, and employment growth remains steady. However, there are many questions as to the continued stability to both of these economic numbers when the planned consumption tax increase is said to kick in by April 2014. Several trade union bodies, with the latest coming from the Japanese Trade Union Confederation, or ‘Rengo’, plans to lobby for pay increases of more than 1.00 percent in the upcoming round of wage negotiations. The move was disclosed in a press release earlier last month. Corporations including Toyota Motor Corp have expressed the management concerns about the standard of living and welfare of its home staff members, given gradual increase in consumer prices, and the impact caused on potential household spending budget spending levels, along with the planned consumption tax hike in April 2014.

Across the Asia-Pacific region on this final trading day for the month of November 2013, markets have largely reacted negatively with the Nikkei 225 Index down by less than six-tenths to eight-tenths of one percent at the time of this write-up. There are other factors impacting most of the early Asian trading session including the political tensions in Thailand, and the recent row over the air- defence corridor space surrounding the northern coastal waters off China, and near South Korea and Japan. US stock index futures are showing some positive optimism, but it is hardly surprising given the nature of a half-day trading session, with an expected low trading volume, and ‘Black Friday’ shopping festivities.

I believe that the question of whether Japan’s economy is finally showing some signs of improvement, and growth remains mixed, and it has been for the past few months since Prime Minister Shinzo Abe took office early this year. There are many controversial policies that his cabinet has introduced and there are several impacts and meaningful changes, but admittedly, the impact and success of any economic policy introduced do have some time lag effects that one has to be realistic about. It is unlikely to be an overnight effect, but a gradual shift in the overall economic fundamentals. I think that if economic numbers are starting to show some signs of improvement, regardless whether it is a 1.0 percent, a 1.0 point drop, as long as policy steps taken to ensure the consistency, sustainability, and viability of the growth projections being set out originally, it is a tangible progress being achieved, and should not be totally disregarded.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc