BoJ raises economic assessment for all nine regions

Chris Scicluna
Emily Nicol

Surveys suggest that Japanese growth was relatively well maintained around the turn of the year
Today’s business surveys suggested that Japanese activity remained relatively well maintained around the turn of the year, e.g. with today’s economy watchers survey for December broadly echoing the modest improvements recorded in the Reuters Tankan and PMI indicators for that month. Indeed, the headline current condition balance rose for the fourth consecutive month, by 0.1pt, to 56.4, its highest reading since 2005. The improvement was supported by another reported increase in household-related demand, with the respective diffusion index (DI) rising to a series high. Admittedly, corporate-related demand eased back slightly in December. And with restrictions on new arrivals to Japan tightened amid concerns about the Omicron variant, economy watchers were somewhat less optimistic about the near-term outlook even before the latest pickup in local new coronavirus cases.

Meanwhile, the latest Reuters Tankan survey suggested that manufacturers were somewhat less upbeat at the start of the New Year not least reflecting persistently high input costs. For example, the headline manufacturing DI fell 5pts in January to +17 (in line with the average in Q4), with a notable weakening in sentiment among firms in the autos, general and electrical machinery sub-sectors. But non-manufacturers were a touch more optimistic, with the respective DI rising 2pts in January to +8, the highest since the start of the pandemic, reflecting a further improvement in retailers’ conditions. While the near-term outlook remains clouded by the pandemic, not least following the placement of three prefectures under quasi state of emergency last week, firms across both sectors expect conditions to improve over the coming three months.

BoJ raises economic assessment for all nine of its regions for first time since 2013
Separately, the BoJ’s latest Regional Economic Report stated that economic assessments had improved over the past quarter in all nine regions for the first time since October 2013, with evidence that the impact of the pandemic had waned somewhat particularly in consumer-facing services. Indeed, the assessment for consumption was revised higher in all nine regions for the first time since 2005. Nevertheless, today BoJ Governor Kuroda stated in his address to regional branch managers that the economy remained in a “severe state”. And so, while the BoJ might well upgrade its economic forecasts in its forthcoming Outlook Report (to be published on Tuesday) – with both near-term GDP and inflation forecasts to be nudged higher and the risks to the inflation outlook no longer to be skewed to the downside – there seems little reason to amend the Bank’s policy framework.

Chinese CPI and PPI inflation both surprise to the downside
Chinese inflation slowed further than expected in December seemingly giving scope to the PBoC to provide additional support to the economy over the near term. In particular, the annual CPI rate fully reversed the rise of 0.8ppt in November to fall back to 1.5%Y/Y as consumer prices dropped 0.3%M/M, the first monthly decline in six months. And the PPI rate slowed a hefty 2.6ppts to 10.3%Y/Y, one full percentage point below the consensus forecast and the lowest since August. The slowdown in consumer price inflation was relatively broad-based, with a 2.8ppt decline in food inflation to -1.2%Y/Y and non-food inflation down 0.4ppt to 2.1%Y/Y. Inflation of services was unchanged at 1.5%Y/Y while core inflation (ex food and energy) was also stable at just 1.2%Y/Y.

The moderation in producer price inflation was in no small part thanks to government measures to support the supply of commodities, not least coal for energy production. Indeed, inflation of raw materials slowed more than 5ppts to a four-month low of 19.7%Y/Y with inflation of mining and quarrying similarly significantly lower. Indeed, inflation of petrol and natural gas slowed more than 20ppts to 45.6%Y/Y. Factory-gate inflation of consumer goods was unchanged at just 1.0%Y/Y. While uncertainties persist surrounding the outlook for coal supply and electricity prices, base effects should allow for further non-negligible declines in PPI inflation over coming months. And while the annual CPI rate might well bounce back over the near term, full-year consumer price inflation is likely to average less than 2.0%Y/Y in 2022.

Euro area IP expected to report only modest growth in November
Today will bring euro area IP data for November. Contrasting with the weakness in Germany and France reported last week, yesterday’s Spanish industrial production data massively exceeded expectations. As such, today’s aggregate figures are expected to report a modest increase in production that month, by a little less than ½%, which would leave output in the first two months of Q4 a little more than ½% above the Q3 average and just 0.3% below the pre-pandemic level.

A Bank of France survey published yesterday evening implied that the euro area’s second largest economy has held up well in the face of the new pandemic wave. The survey suggested that output had maintained an upwards trend in industry and services in December, with moderate growth in construction too. And so while it revised down slightly its estimate for Q4 GDP from the November release, it still forecast respectable growth of 0.6%Q/Q. While firms continued to report recruiting difficulties, the share of manufacturers and construction firms reporting supply issues fell again in December, albeit remaining close to 50% in both sectors. The survey also pointed to a further modest increase in output in certain manufacturing sub-sectors and stable activity in construction in January albeit with a marked decline in consumer-facing services. Overall, the BoF expects output to remain around ¾% above the pre-crisis level this month.

Politics to remain the focus in the UK as Johnson has to explain himself to Parliament
It will be a quiet day for UK economic releases allowing attention to remain on Prime Minister Boris Johnson, who will have to explain the news of yet more party shenanigans in Downing Street and his questionable grasp of the truth to Parliament, as support among the public, media and within his party continues to diminish rapidly.

US CPI data key focus today
After Jay Powell yesterday reiterated the Fed’s concerns about prolonged high inflation, focus today will undoubtedly be on the December CPI report. With energy and food prices expected to have remained elevated, Daiwa America’s Mike Moran expects consumer prices to have risen 0.4%M/M in line with the Bloomberg consensus. As such, the annual pace of inflation is expected to have accelerated to 7.0%Y/Y for the first time since the early 1980s. Supply-demand imbalances are likely to be evident in the core component, where the expected monthly increase would mark the sixth increase of 0.4%M/M or more in the past nine months to leave the annual rate jumping close to 5½%Y/Y. Today will also bring the Fed’s latest Beige Book. 

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