Japan trade deficit hits new record high in August as the value of imports exacerbated the weaker yen
Japan’s goods trade numbers again disappointed, highlighting a further deterioration in the country’s terms of trade as the sharply weaker yen exacerbated the impact of sky-high energy prices. On a seasonally adjusted basis, Japan’s trade deficit widened for the fifth consecutive month to a series high ¥2.37trn in August, compared with a deficit of just ¥0.29trn a year ago. While the pace of increase in imports (1.5%M/M) was softer than of late, this still marked the twelfth increase out the past thirteen months to be up roughly 50%Y/Y. And energy continued to account for a little more than half the annual increase, with the value of imports of petroleum up 90%Y/Y, LNG up 140%Y/Y and coal up 240%Y/Y. Moreover, the increase in imports almost fully reflected higher prices, with volumes up less than 3%Y/Y. The past week’s PPI numbers also highlighted the impact of the weaker exchange rate, with the increase in producer import prices in yen terms up 42.5%Y/Y in August, but less than 22%Y/Y on a contract currency basis.

The deterioration in the trade position also reflected a drop in the value of exports, by 0.7%M/M, for the first time in eleven months. Admittedly, given the low base a year earlier, this still left them up 22.1%Y/Y, the strongest annual growth for a year, reflecting a surge to the US (33.8%Y/Y). When adjusting for prices, the increase in the volumes of shipments to the US was somewhat less impressive, up 10½%Y/Y. And with shipments down to China (-9.0%Y/Y) and the EU (-1.5%Y/Y), total export volumes fell 1.2%Y/Y. On a seasonally adjusted basis, the BoJ’s measure of export volumes declined 0.6%M/M, albeit this left them still trending 2.7% higher than the Q2 average. And with import volumes up 2.8% on a similar basis, net trade currently looks set to have a broadly neutral impact on GDP growth in Q3.

Tertiary activity impacted by the rise in Covid cases at the start of Q3
In contrast, today’s tertiary activity numbers suggested that Japan’s consumer-facing services were impacted by the rise in Covid infections at the start of Q3. Indeed, total services activity fell for the second successive month in July and by a steeper-than-expected 0.6%M/M, admittedly up 2.9%Y/Y but still more than 2% lower than the pre-pandemic level. The weakness principally reflected a marked drop in accommodation services (-16.5%M/M), with eating out also down (-3.5%M/M). Transport, wholesales trade and medical care services were also weaker in July. With the PMIs signalling a further loss of momentum in August too, Japan’s services sector looks set to be a drag on GDP growth in Q3.

French inflation in August revised up, increasing probability of upwards revision to euro area inflation tomorrow
The chances of a slight upwards revision to the estimate of euro area inflation in August, when the final figures are published tomorrow, have increased further. Indeed, following the publication of increased estimates of Spanish inflation on Tuesday, French inflation was also revised up this morning, by 0.1ppt, taking the EU-harmonised HICP rate to 6.6%Y/Y (down from 6.8%Y/Y in July) and the national CPI measure to 5.9%Y/Y (from 6.1%Y/Y the prior month). Within the detail, inflation of both food and energy in August were stronger than previously thought, so that the core CPI measure was left unrevised at 4.7%Y/Y, nevertheless 0.4ppt higher than in July and the highest on the series dating back more than three decades. Pressure on the core measure in August came in particular from non-energy industrial goods, for which inflation jumped 0.8ppt to 3.5%Y/Y in part due to shifts in the timing of summer discounting. Within that category, inflation of clothing, furniture, household utensils and cars all accelerated significantly.

Euro area goods trade deficit to have widened in July; labour costs figures likely to be flattered by a low base a year ago
This morning will bring updates on euro area goods trade in July and labour costs in Q2. With export values still relatively subdued in line with the weakness in manufacturing output reported yesterday, like in Japan, the euro area’s trade figures are expected to report a widening in the deficit back close to April’s series high of €32.3bn due not least to high prices of imported energy. Separately, following a sharp pickup to 3.8%Y/Y in Q1 on special pandemic-related payments, euro area labour cost growth might well accelerate further in Q2. However, that would in part reflect the low base a year earlier, when costs fell 0.1%Y/Y marking the series low.

BoE inflation attitudes survey to highlight a further rise in expectations
In the UK, today will bring the BoE’s postponed publication of its quarterly Inflation Attitudes Survey, which is highly likely to report a further rise in expectations for the coming twelve months from the series high of 4.6% registered three months ago. Expectations for inflation further ahead are also likely to have picked up, to add to concerns among some members of the MPC about potential second-round effects. Of course, the survey will have been conducted before the government made clear its readiness to cap household energy bills well below Ofgem’s recommended level over the coming two years.

US retail sales and IP reports likely to underwhelm
The August retail sales report is set to be the main focus in the US. Once again, the data will bear the hallmark of significant relative price changes. The big drop in gasoline prices will likely restrain the headline nominal retail sales figure. But while the further big rise in core prices last month might have restrained sales in real terms, the overall value of sales will still likely look inflated. Our colleagues in Daiwa America expect the net effect of all these shifts to be underwhelming, forecasting total sales to fall 0.1%M/M following zero growth in August. Meanwhile, industrial production last month also looks likely to have been a damp squib. The shorter factory workweek suggests a negative contribution from manufacturing output. But increases in the rotary rig count and mining employment suggest a firm increase in mining activity, while elevated temperatures are expected to boost utility output. Overall, Daiwa America economists look for modest growth of 0.1%M/M. August import and export price figures, as well as the Empire manufacturing index for September and latest jobless claims numbers cap a busy day ahead for US economic data.