Abe set to resign:
After plenty of speculation, Abe will on the hour hold a full press conference – his first for more than two months – confirming his intention to resign on grounds of ill health. That announcement will trigger a process within his ruling Liberal Democratic Party (LDP) to appoint a replacement of Abe as its President, with the winner of that election then almost certainly to be confirmed as the new Prime Minister in a subsequent vote in the Diet.
At this stage, however, the timing of Abe’s departure remains unclear. And this will be key in determining the identity of his successor. If – as happened in 2007 when Abe stepped down from his first term on grounds of ill health – an extraordinary vote has to be called “at the soonest date possible” (which was just 11 days in 2007), only MPs and representatives of local party chapters will be allowed to vote. In such circumstances, another caretaker term as Prime Minister for Taro Aso (current Finance Minister and Deputy PM who previously served as PM in the midst of the global financial crisis in 2008-9 and would represent clear continuity) through to September next year, when Abe’s term was meant to end, would seem most likely.
But if, as reports currently suggest might be more likely, a full LDP leadership election involving all party members will be held, the process will be set on a longer timetable, of at least one month and possibly several months. And in such circumstances, the identity of the next PM will be far more uncertain, with several candidates seemingly capable of winning the succession.
Among those likely candidates, combative former Minister for Defence and Regional Revitalisation Shigeru Ishiba – long the number one rival to Abe within the LDP – might hope that his time has finally come, particularly as polls suggest that he is most popular with the public. But current Defence Minister Taro Kono, former Foreign Minister and close Abe ally Fumio Kishida, Chief Cabinet Secretary Yoshihide Suga, and right-wing Economy Minister Yasutoshi Nishimura (who’s been responsible for tackling the pandemic) might all be in with a shout.
Of course, the question is what this might all mean for policy. And the answer, at least from an economic perspective, will probably be “not much”, with the differences between the candidates at this stage rather more presentational (with Ishiba even more populist than Abe) and personal than substantive or ideological. Certainly, there will be no sudden move to fiscal consolidation. But questions would arise swiftly about Kuroda’s future at the BoJ and the preference of his successor of the new PM. Indeed, both Ishiba and Kono have in the past made the case for the BoJ to set out an exit strategy from hyper-accommodative policy, although actually achieving that in current (and likely future) economic conditions will be far easier said than done.
Crucially, the departure of Abe – who earlier this week became Japan’s longest continuously-serving PM has served uninterrupted since end-2012 – will bring to an end the recent period of unrivalled political stability. The risks are that Japan will slip back into the previous cycle of weak, short-lasting Prime Ministers and associated repeated bouts of political uncertainty – which will be bad news for the predictability and stability of policymaking, diminish the likelihood that difficult economic reforms might ever be enacted, and generate unwelcome noise for Japanese financial markets. Hence today’s weakening of Japanese stocks and appreciation of the yen.
Tokyo CPI falls more than expected:
In terms of economic data, today’s Tokyo CPI figures fell short of expectations, with headline inflation in August reversing the 0.3ppt increase seen in July, back to 0.3%Y/Y. And this was in spite of a jump in food inflation, up 1.1ppts to 2.9%Y/Y, a 22-month high. So, the BoJ’s forecast measure of core inflation (excluding fresh foods) fell a much steeper 0.7ppt in August to -0.3%Y/Y, the weakest rate since early 2017. The BoJ’s preferred gauge of underlying price pressures – CPI excluding fresh foods and energy – was similarly down 0.7ppt to -0.1%Y/Y, the first negative reading for three years. And when excluding all foods and energy (the internationally comparable core measure of CPI), inflation fell 0.8ppt to -0.4%Y/Y. Of course, when adjusting for last October’s consumption tax hike, headline inflation fell to 0%Y/Y, with all core measures more firmly in deflationary territory.
Within the details, the main downwards pressure came from services inflation, which fell 1.1ppts to -1.0%Y/Y, the weakest reading for more than a decade. And this principally reflected a slump in hotel charges (down a record-32%Y/Y), as the government’s ‘go to travel’ promotion subsidies reduced prices. Transport costs also continued to fall, driven by a more than 6%Y/Y decline in airfares. And against the backdrop of subdued domestic demand, prices of household durable goods were down compared with a year earlier for the seventh consecutive month.
The hospitality sector is likely to continue to suffer from a lack of overseas visitors (which stood at just 3,600 in July), even though the government is looking at easing its travel restrictions shortly. And soft demand in the face of the July spike in domestic coronavirus cases will also continue to weigh on consumer-facing services inflation going forward. With wages having recently weakened significantly and surveys pointing to a further deterioration of labour market conditions, domestically generated inflation more generally will remain subdued. And so we expect nationwide inflation to have fallen back into negative territory in August and remain in negative territory through to early 2021.
German consumers more downbeat:
Today will bring a handful of European sentiment surveys, including most notably the European Commission’s latest indicator, which often provides the best guide to euro area GDP growth. Despite the resurgence in coronavirus cases across the region, these are expected to point to further modest improvements in business and consumer conditions in August, albeit leaving the headline Economic Sentiment Indicator still well below the pre-pandemic level.
But having risen notably last month as German households benefitted from the temporary VAT cut – with the headline GfK consumer confidence index up more than 9pts to -0.2 – today’s GfK survey flagged renewed pessimism about the outlook ahead, with the index forecast to drop back to -1.8 next month. With the number of new coronavirus cases in Germany this week rising to the highest since April, that might be unsurprising. Within the survey detail, despite marginal gains in economic expectations and willingness to spend, German consumers were seemingly much more downbeat about their income expectations. And there was a further increase reported in households’ propensity to save too.
French inflation falls back as temporary effects reverse:
There were no surprises from the first of the flash inflation estimates for August, which came this morning from France. In particular, having leapt 0.7ppt to 0.9%Y/Y last month, French CPI inflation on the EU-harmonised measure fully reversed back to 0.2%Y/Y. The detail on the national measure showed that the drop in inflation this month principally reflected lower prices of non-energy industrialised goods, as the delayed summer sales finally got under way. Indeed, inflation of manufactured products fell a marked 2.0ppts to -0.2%Y/Y. In addition, food inflation slowed too (down 0.3ppt to 0.8%Y/Y), negating the slightly less steep decline in energy prices (up 0.3ppt to -7.1%Y/Y). Inflation of services, meanwhile, was unchanged at 0.9%Y/Y. So, like the headline measure, French core inflation also will have fallen sharply – an outcome that seems bound to be replicated in the euro area figures due on 1st September.
Today in the UK and US:
The Fed’s Jackson Hole economic symposium will continue to attract attention, with BoE Governor Bailey set to give a keynote speech at the opening today. After Fed Chair Powell yesterday used his speech to introduce revisions to the Fed’s policy framework, Bailey’s comments will be scrutinized for any further insight into future BoE policy adjustment, as well as the kind of conditions that might persuade it to shift Bank Rate into negative territory.
In terms of economic data, the US will bring several releases of note giving insight into the pace of recovery at the start of Q3, with advance goods trade and personal income and spending figures for July (as well as the respective deflators) due. While income is likely to have remained subdued as transfer payments likely receded for the third consecutive month, spending looks set to have risen at a solid rate, albeit softer than in June as the pandemic revived. Meanwhile, following the downside surprise to the Conference Board’s consumer confidence survey earlier in the week, the revised University of Michigan’s consumer sentiment indicator might well be nudged lower.