The Japanese government released its latest economic figures on January 31, 2014, including the December 2013 readings on Consumer Price Index (CPI), industrial production, and unemployment figures, and among the various data releases, the core CPI number came in above expectations where consumer prices rose by 1.3 percent on a month-to-month (mtm) basis for December 2013, versus consensus estimates of 1.2 percent. Readers might be reminded that the core CPI figures and the trends are being monitored closely by Bank of Japan’s (BOJ) as it has earlier set an overall 2.0 percent inflation target that is being anticipated to be achieved during Fiscal 2015 starting March of next year.
The other data releases have also shown modest improvements, where the unemployment rate came in at 3.7 percent, below the expected 3.9 percent, and industrial production up by 1.1 percent on a month-to-month (mtm) basis, as compared to an expected 1.2 percent increase. Both sets of data are for the month of December 2013.
The market reaction to these economic data releases coming of Japan have largely been quite positive, with the Japanese Yen (JPY) currency trading at approximately USD/JPY 102.770 – 102.790, indicating a general weakness in the Yen currency, while the Nikkei 225 stock index trading at 15,100, up by approximately 93.0 points, or 62 basis points. These quotes are as of 0930 hrs (Hong Kong/Singapore time).
With the latest economic data releases coming out with Japan, coupled with the slow start to the structural reforms that Prime Minister Abe has originally set out as part of his government’s overhaul of the Japanese economy, there have not been any major indications of any sustained economic growth being shown yet. As readers might have probably know about my past write-ups on the Japanese economy stressing the importance that urgent structural reforms including wage increases, enlarging the female labour participation rates, corporate tax reforms, among others that have need to be properly put in place, but has so far not been firmly laid out, and has largely been a disappointment being expressed by many Japanese households and businesses. The disappointment has been translated into falling wages, rising discontent among many ordinary Japanese wage earners, slow manufacturing and services sector growth, among others. In essence, lots of uncertainties which leads to weakness in spending, and capital expenditures. The end result could be a potential backlash if the Abe government does not show work conscientiously towards making Japanese household and business conditions much easier, especially with the upcoming implementation of consumption tax from the current 5.0 percent to 8.0 percent in April. This has a bearing on population growth, child bearing decisions, solving the aging population question, encouraging foreign direct investments (FDI), welfare distribution, health care, infrastructure spending, other public and economic policies as well.
Although the gradual rise in inflation as shown by the latest CPI numbers has gone on to fulfil much of the Japanese government’s goals in reflating the economy, there are still concerns of whether the inflation is mostly derived from imported inflation including higher fuel prices as a result of the slow restart of the crippled Fukushima nuclear power facilities, the need to import crude oil in order to substitute the loss of the sole energy source coming from nuclear powered plants, slowing export growth, rising food and other forms of energy costs. Imported inflation can sometimes be potentially harmful for a slow growth economy such as what Japan is currently experiencing if there are no corresponding improvements to export growth, and level of foreign direct investments (FDI), where some of the pillars of economic progress such as inflows coming from growth in income, savings and investments. The yields on the Japanese Government Bonds (JGBs) are at historic lows and if investments are not being diverted to higher-yielding investment grade products, including equities and high quality corporate debt, the public pension funds that house most of the retirees’ money might not grow much. There is also a need for a wide scale introduction of financial education, and planning through education institutions, community centres, businesses, whereby the majority of the Japanese households are able to learn how to equip themselves with the basic knowledge in order to manage their investments, rather than sticking with only the JGBs as means of future retirement goal fulfilments.
In summary, I believe that the road to eventual economic recovery remains weak despite the gradual improvements being shown in recent economic data releases. As long as the Abe government has not grapple with the nuts and bolts of fixing the structural reform as part of the overall ‘Three Arrows’ policies (fiscal, monetary and structural goals), there cannot not be any major long-term, sustainable results coming out of the series of legislations, and reforms that the Abe government has introduced so far since taking office early last year.