Post-tax hike pullback in Japan’s consumption smaller than in 2014

Emily Nicol
Chris Scicluna

After further modest gains in US stocks at the end of last week, the main Asian equity indices started the week on the front foot, largely ignoring the slight tick up in the oil price triggered by distribution disruptions in Libya and Iraq. In particular, Japan’s TOPIX closed 0.5% higher as the latest Japanese consumption figures pointed to modest recovery after the initial post-tax hike slump in October (see details below), while the China’s CSI 300 was up 0.8%.

In the bond markets, ahead of tomorrow’s BoJ announcement, the JGB market was only a touch weaker – 10Y yields edged 1bp higher to 0%, bang in line with the BoJ’s target. And moves in European markets are likely to be limited today, with no top-tier data due for release and US markets closed. Looking ahead, policy setting meetings this week include the BoJ’s announcement tomorrow (which will be accompanied by its quarterly Outlook Report) and the ECB’s decision on Thursday – both should see policy left unchanged. In terms of economic releases, the flash January PMIs on Friday will be of particular interest (particularly for the UK), while labour market reports are also due from the UK (tomorrow) and Australia (Thursday).

As the BoJ’s latest two-day Policy Board meeting got underway, today saw the release of Cabinet Office’s synthetic consumption index, which typically offers the best guide to the national accounts measure of household expenditure. Like other measures of household spending, this showed some recovery following the initial post-tax hike slump, with consumption up 1%M/M in November, albeit following a steeper decline than initially estimated in October (revised by 1.6ppts to -4.2%M/M). While this left consumption on average so far in Q4 trending 2.1% lower than the average in Q3, this implied a much smaller post-tax hike pullback than in 2014 – the equivalent period saw a drop of more than 5%.

So, while Japan’s economy clearly went into reverse in Q4, the manufacturing sector is still struggling – today’s revised IP report for November showed a steeper drop than initially estimated of 1%M/M to leave output on track for a drop of almost 3½% in Q4 – and the full magnitude and duration of the impact of the October’s tax hike on economic activity is still not clear, last week’s Regional Economic Report suggested that the economy has weathered the tax hike as well as might have been hoped. As such, when the meeting concludes tomorrow, the Policy Board might feel little need to amend significantly its assessment of the outlook, maintaining the view that the economy is likely to continue on an expanding trend. So there is no expectation for a change to its key policy parameters.

Of more interest will be its updated economic forecasts, for further insights into its assessment of the impact of the consumption tax hike. But recent upward revisions to the estimates of GDP growth in 2019 – by a cumulative ½ppt in the first three quarters – will see the BoJ revise up its full-year growth projection for FY19. The government’s fiscal stimulus package should provide a boost to its FY20 growth forecast too. And changes to its inflation forecasts seem likely to be minimal.

The second half of the week will bring a few releases of note, including December’s goods trade report and November’s all-industry activity indices (Thursday), and January’s flash PMIs (Friday). The latest CPI release (Friday) will likely confirm still very subdued underlying price pressures, with headline inflation expected to rise 0.2ppt to 0.9%Y/Y on the back of higher energy price inflation.

Euro area:
Like in Japan, this week will also bring the latest policy meeting of the ECB’s Governing Council, only the second to be chaired by Christine Lagarde. But this seems likely to be relatively uneventful. There seems no reason whatsoever for a change of monetary policy or forward guidance. And with no new economic forecasts to be published, the Governing Council’s overall assessment of economic conditions will not change either. We would expect Lagarde again to take comfort from signs of stabilisation in the growth slowdown and note the mild increase in underlying inflation in line with previous expectations. And, as in December, she might judge the downside risks to the economic outlook to have become even less skewed to the downside. Most notable might be what Lagarde has to say about the ECB’s strategic policy review, although with the work barely underway she will certainly not preempt its findings.

Data-wise, Friday’s flash January PMIs will be most closely watched. In December, the services PMI rose to a four-month high (52.8) to suggest steady growth in the sector but the equivalent index for manufacturing (46.3) fell back below the average for the second half of the year, and thus close to the bottom of the range of the past seven years. That saw the composite PMI rise 0.3pt to 50.9, the highest since August but still consistent with a slowdown in economic growth over the fourth quarter as a whole. There are few additional top-tier releases due over the coming week, although other January survey indicators include the ZEW investor sentiment indices (tomorrow), the French INSEE business confidence indices (Wednesday) and the Commission’s flash consumer confidence survey (Thursday).

After last Friday’s very weak retail sales figures coming on the back of some poor monthly GDP and inflation data, the probability of monetary policy action at the MPC’s end-January meeting has unsurprisingly risen sharply – market implied probabilities attached a more than 70% chance of a 25bp cut. And in the absence of a significant upside surprise to this Friday’s flash PMIs, we would agree that a cut to 0.50% will be forthcoming on 30 January. The expectation is for improvements in the manufacturing and services indices to push the composite PMI back above 50 for the first time since August. The consensus forecast for the composite PMI of 50.5, however, would seem unlikely to prevent a rate cut at the next MPC meeting.

Other top-tier releases due this week will also factor into the BoE’s policy judgement, most notably tomorrow’s labour market report. This is expected to report a stable unemployment rate at 3.8% in the three months to November, and a rebound in job growth to above 100k3M/3M for the first time since June. Pay growth is expected to slow for a fifth consecutive month, to 3.4%Y/Y when excluding bonuses, which would be the softest since April. Among the week’s other new releases, the December public finance figures and the CBI’s latest Industrial Trends survey are due on Wednesday.

It should be a relatively quiet week for top-tier US economic releases. With markets closed today for Martin Luther King Day, the first of the week’s releases will come on Wednesday with existing home sales figures for December and the FHFA home price index for November. That day will also bring the latest Chicago Fed national activity index, with the Kansas Fed manufacturing activity index due the following day. Thursday will also see the release of the Conference Board’s Leading Index for December, while the flash Markit PMIs for January are due Friday.

The main economy focus in Australia this week will be Thursday’s labour market report. This is expected to show only a modest pickup in employment in December leaving the unemployment rate unchanged at 5.2% (although the data collection might well have been disrupted by the escalation of the bush fire crisis in the second half of the month). Ahead of this will bring skilled vacancy figures for December on Wednesday. That day will also bring the Westpac consumer confidence index for January which is likely to report a notable deterioration in household sentiment at the start of the year.


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