Activity surveys were negative in October. Jibun Bank’s preliminary survey reported a decline in the manufacturing PMI to 49.0 (-0.7pp). The decline was more pronounced for activity in the services sector, with the corresponding PMI losing 3.8pp to 49.3, contracting for the first time since June. According to the Bank of Japan’s (BoJ) quarterly Tankan survey, the overall business climate improved slightly in Q3, but remained stable for large manufacturing companies. We expect growth to fall to +0.3% q/q in Q3 (-0.4pp compared to Q2 2024), due to the dissipation of the technical upturn that had buoyed it in the previous quarter.
Inflationary pressures diminished in September. Core inflation (excluding unprocessed food) fell to +2.4% y/y (-0.4pp) for the first time since April. The result comes from a monthly decline in the index (-0.4%), due to the reinstatement of subsidies for electricity bills. At the same time, new core inflation, also excluding energy, rose to +2.1% y/y (+0.1pp). In addition, the rise in the price of services continued to slow (+1.3% y/y), failing to bring the manifestation of a wage-price cycle allowing monetary tightening to continue. Finally, October’s Tokyo CPI figures (core inflation down to +1.8% y/y, -0.2pp) suggested a continuation of the downward trend at national level.
The labour market remained under pressure in August, with the unemployment rate falling to 2.5% (-0.2pp). In terms of income, salary growth excluding bonuses has remained at unprecedented levels since 1993, amounting to +2.4% y/y (+0.2pp). On the other hand, after two months of progress, the real wage index has deteriorated again (-0.8% y/y). The other hard data available for August displayed a contrasting picture, between the decline in industrial production (-3.3% m/m) and new core orders for machines (-1.9% m/m) on the one hand and the increase in household spending (+2.0% m/m) on the other, while remaining below its level a year ago (-1.9% y/y).
The BoJ has started a very gradual hiking cycle of its policy rate, currently at +0.25%, which can hardly go much faster given the inflationary pressures which remain very contained. However, Governor Kazuo Ueda admitted the risks associated with excessive caution, which the weakening of the JPY (USD/JPY at 151.89 on 24 October) also highlights. At the same time, the early parliamentary elections (held on 27 October) have resulted in a weakening of the political position of the new Prime Minister, Shigeru Ishiba.
Article completed on 29 October 2024
