Japan's inflationary pressures remain muted

Emily Nicol

Having reached a new record high on Wednesday yesterday saw US equities slip back (the S&P 500 fell 0.5%) matching similar declines seen across European markets. So, Asian equities started today on the back foot. And as the latest Tokyo CPI figures suggested inflation remained subdued at the start of Q3 (see below for more details), the Topix failed to gain traction through the day to close 0.4% lower. In contrast, China’s CSI 300 advanced later in the session to be around 0.2% higher.

In bond markets, European government bonds made losses yesterday, likely in response to ECB President Draghi’s confirmation that an immediate policy easing wasn’t considered at yesterday’s meeting. Nevertheless, the Governing Council provided a strong signal that a multi-faceted easing package in now on the cards, with our expectation for an interest rate cut, a tiered interest rate system and a new net asset purchase programme to be announced in September – for more details please see yesterday’s Euro wrap-up. So, perhaps unsurprisingly, European govvies have opened stronger so far this morning.

Today’s European focus will be on national sentiment surveys which are likely to emphasise the challenging conditions faced by firms across the region. Meanwhile, in the US, the first estimate of Q2 GDP is likely to confirm a moderation in growth last quarter to its softest pace since the start of 2017.

Ahead of the conclusion of the BoJ’s monetary policy meeting on Tuesday, which will bring updated Policy Board members’ economic forecasts, today brought the first insight into inflationary pressures in July with the Tokyo CPI figures. And these suggested that underlying price pressures remained little changed at the start of the third quarter. Admittedly, headline inflation eased more than expected in July, falling 0.2ppt to 0.9%Y/Y, a four-month low. But this principally reflected lower food price inflation, which declined 0.6ppt to 1.2%Y/Y, with the year-on-year increase in the price of fresh foods dropping a larger 3.5ppts to 1.0%Y/Y.

So, when excluding fresh foods, the BoJ’s forecast core measure of CPI moved sideways at 0.9%Y/Y. When also excluding energy prices, the BoJ’s preferred core-core measure was also unchanged at 0.8%Y/Y. And excluding all food and energy prices, the core-core measure – which aligns most closely with figures reported by other major economies – remained at just 0.6%Y/Y.

Within the detail, alongside the easing in food price inflation, energy price inflation also provided a disinflationary influence (down 1ppt to 2.5%Y/Y the softest increase since May 2017). That move in part reflected a further fall in gasoline prices (down 1.8ppts to -5.3%Y/Y), while the year-on-year increase in electricity prices (3.4%Y/Y) was the softest for more than two years. But this was offset in part by higher prices of mobile phone handsets, with the 0.2%Y/Y rise the first year-on-year increase since May 2018 and followed a decline of more than 9%Y/Y previously.

While today’s release suggests that core CPI at the national level might move sideways in July, there is no doubt that risks to the near-term inflation outlook remain skewed to the downside. Certainly, energy prices are likely to subtract from annual rates over the near term. And with economic growth remaining modest (at best) and wage growth still declining, underlying price pressures remain largely muted. So, while the BoJ will no doubt maintain the usual degree of optimism regarding the inflation outlook, we do expect a modest downwards revision to its core CPI forecast of 1.1%Y/Y in FY19. And it will continue to acknowledge that core CPI is expected to remain persistently below its 2% target throughout the forecast horizon.

Euro area:
Following the excitement of yesterday’s ECB meeting, which provided a clear signal that an extensive easing package was likely forthcoming at September’s meeting, it should be a quieter end to the week in the euro area, with July national sentiment indices from France and Italy due alongside the publication of the ECB’s latest Survey of Professional Forecasters.

We have already see the release of the French INSEE consumer confidence survey, which showed the headline indicator edging higher at the start of the third quarter for the seventh consecutive month, to 102, an eighteen-month high, with the share of households considering it a suitable time to make major purchases also increased for the seventh successive month, remaining above its long-run average.

In marked contrast, Italy’s ISTAT consumer and business sentiment surveys for July are expected to show that conditions remained tough at the start of the third quarter, with the headline consumer confidence index having fallen in June to a near-two-year low, while business confidence was close to the bottom of the recent range.

In the US, the main focus today will be the first estimate of Q2 GDP. Robust growth in consumer spending looks set to be partially offset by negative contributions to growth from inventories and net exports. Indeed, we expect growth to have moderated by a little more than 1ppt to 2.0%Q/Q annualised, which would be the softest pace since Q117.

It should be an uneventful day for economic or political news, with PM Boris Johnson’s speech in the North of England unlikely to provide any meaningful insight into his near-term policy intentions.

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