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Japan’s inflation to remain below target

July 2017

Although Japan’s economy appears to be strengthening in some areas, the outlook for inflation remains subdued. Despite an increasingly tight labour market, Japanese companies appear reluctant to increase wages and prices, suppressing inflationary pressures.

  • Japanese exports rose for a seventh consecutive month
  • Japanese mid-caps outperformed larger companies during July
  • Australia’s economy continued to strengthen

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Export activity in Japan rose for a seventh consecutive month, boosted by overseas demand for cars and electronic goods. The Ministry of Finance (MoF) reported that exports rose at an annualised rate of 9.7% in June, compared with May’s increase of 14.9%. In comparison, imports rose by 15.5% year on year.

“Although Japan’s labour market has tightened, this has not yet fed through to wages”

During July, the benchmark Nikkei 225 Index fell by 0.5%, while the broader-based Topix Index rose by 0.4% and the TSE Second Section Index climbed by 1.7%

Japan’s Cabinet Office released a relatively positive assessment of the country’s economy during the month. According to the report, nominal GDP growth and corporate profits have reached record levels; private consumption is improving, and industrial production and exports are picking up in response to the “moderate” recovery of overseas economies. The Cabinet Office expects Japan’s economy to expand during the current fiscal year at a nominal rate of 2.5% and a real rate of around 1.5%. Looking ahead, continued and sustained strengthening in Japan’s economy is likely to fuel expectations for stronger inflation.

The Bank of Japan (BoJ) maintained its monetary stance at policymakers’ July meeting, and officials remain relatively optimistic about the economic outlook. Nevertheless, BoJ officials remain somewhat downbeat towards the outlook for inflation, commenting that recent developments in CPI have been “relatively weak”, curbed by companies’ reluctance to increase wages and prices. Although Japan’s labour market has tightened, this has not yet fed through to wages. The BoJ cut its forecasts for inflation from 1.4% to 1.1% in the current fiscal year, and from 1.7% to 1.5% next year, and does not expect inflation to reach its 2% target until the following year.

Australia’s economy is continuing to strengthen, according to the Reserve Bank of Australia (RBA) which believes that quarterly economic expansion is likely to have picked up in the second quarter of 2017. Policymakers estimate the nominal neutral real interest rate – the rate at which output growth is at potential and inflation is stable – to have fallen from 5% to around 3.5%, triggering speculation that the RBA might be in a position to consider an increase in interest rates. The RBA’s key interest rate has remained at an all-time low of 1.5% since August 2016 , dampened by uncertainties surrounding the property sector and the labour market. Over July, the ASX All Ordinaries Index edged 0.2% higher.


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