Japan's economic growth should benefit from a technical upturn in Q2: we expect growth of 0.5% q/q after the contraction in Q1 (revised downwards to -0.7% q/q). The outlook remains negative – particularly for demand, despite the tax cuts introduced in June – while household consumption spending contracted by -1.8% y/y in May. Furthermore, while wage increases (excluding bonuses) reached their highest level since 1993 in May (+2.5% y/y), a sign of the growing transmission of negotiated wage increases (+5.1% y/y according to the Rengo trade union), real incomes are still not rising (-1.4% y/y).
Monthly activity surveys suffered a setback in June: at 50.0 (-0.4 points) for the manufacturing PMI and 49.4 (-4.4 points) for the services PMI, which moved into contraction territory for the first time since August 2022. The composite PMI also shows a contraction (49.7, -2.9 points), with contrasting signals between input prices (61.6, +1.2 points) and output prices (53.9, -1.6 points), suggesting a reduced ability to pass on rising production costs to selling prices. As for the Bank of Japan's (BoJ) quarterly Tankan survey, it reports, at aggregate level (all industries and company sizes), a stable business climate in Q2.
Core inflation (excluding unprocessed food) picked up again in May (+2.5% y/y, +0.3pp) – which is likely to precede a further acceleration if Tokyo's underlying CPI in June is anything to go by (+2.1% y/y, +0.2pp) – against the backdrop of the withdrawal of measures relating to energy prices. While energy inflation soared (+7.2% y/y, +7.1pp), the price of services continued to decelerate (+1.6% y/y, -0.1pp). Consequently, the cause of the rebound in inflation does not correspond to the virtuous circle of income-consumption reflation expected by the BoJ in order to pursue its monetary normalisation.
With the Central Bank's next meeting (30-31 July) due to present a detailed plan for reducing the pace of bond purchases, the Bank's latest 'Summary of Opinions' is paving the way for an adjustment in the degree of easing in financial conditions. In this respect, we expect the uncollateralised overnight call rate, currently at +0.0%/+0.1%, to move again (+0.15pp) in September.
Article completed on 12 July 2024 - In collaboration with Élisa Petit, intern
