March saw an improvement in activity in Japan, according to the Jibun Bank PMI survey. Both the manufacturing index (48.2, +1.0pp), thanks to a widespread rise in the main sub-components, and the non-manufacturing index (54.9, +1.3pp) recovered, allowing the Composite index to reach its highest level since August 2023 (52.3, +1.7pp).
The GDP estimate for Q4 2023 has been revised upwards. The quarterly growth rate rose from
-0.1% q/q to +0.1%, due to a better result for private non-residential investment. While this adjustment has the benefit of symbolically bringing Japan out of technical recession, it does not change the picture for the national economy as a whole. The latter continues to suffer from depressed domestic demand, and we expect a contraction in GDP in Q1 2024 of around -0.2% q/q.
Inflation, as expected, rebounded in February, due to the effect of the February 2023 fiscal measures disappearing, namely the subsidisation of domestic energy. Thus, the Core CPI, a benchmark index that includes all components except unprocessed food, recorded an increase of +2.8% y/y (+0.8pp). Total CPI grew at the same rate (up +0.6pp compared to January), while the “New Core”, excluding unprocessed food and energy, slowed (+3.2% y/y, -0.3pp).
The Bank of Japan took the somewhat historic decision to end its so-called NIRP (Negative Interest Rate Policy). The latter, introduced in 2006 in the face of the chronic problem of insufficient inflation, was particular to Japan. Thus, at its March meeting, the BoJ raised its key rate for the first time since 2016, with the target rate rising by +20 bp to +0.1%. The decision was also made after the announcement by the Rengo union that employees concerned had achieved an average salary increase of +5.3% over a year, a record since the start of the study in 1991, which the BoJ hopes will help to set the long-term inflation level around the target of 2%.
At the same time, the policy of controlling the yield curve is being discontinued. We now anticipate a very incremental normalisation of Japan’s monetary policy, with a half-yearly interest rate hike bringing the key rate to +0.75% by the end of 2025.
Article completed on 25/03/2024
