–July Factory Output to Show Pullback After Recent Gains, Heat Wave Props Up Retail Sales, Sluggish Household Spending Continues amid High Costs
(MaceNews) – Financial markets have largely priced in a follow-up interest rate hike by the Bank of Japan in September, with only a three-month interval instead of an earlier expectation of twice-a-year policy normalization pace. That would come against the backdrop of Japan’s still wobbly economic recovery and creeping inflationary pressures.
In recent years, inflation was triggered by the pandemic-era global supply chain breakdown, which was aggravated by Russia’s invasion of Ukraine in February 2022. Four years later, the U.S.-Israeli war against Iran caused another spike in energy and commodities prices. This time, geopolitical uncertainties have become even more uncertain by the intensity of the Mideast conflict and its far-flung impact. The Trump administration’s protectionist trade policy is adding to elevated costs.
In this context, interest rate hikes by central banks are intended to cool off price pressures by restraining economic activity but Japan’s economy is far from overheating. It is still receiving a mild form of life support comprising on-and-off fuel and utility subsides and occasional cash handouts.
So why do Bank of Japan policymakers have to keep raising rates? Their answer is that the short-term interest rate has been only gradually raised to around its current target of 1% from near zero in the past two years, and thus it is still stimulative to economic activity, particularly when interest on loans are adjusted for inflation.
BOJ officials stress that they don’t target foreign exchange rates in policymaking but they are fully aware that the negative impact of the protracted weak yen, which keeps import costs high, overwhelms the positive effect of boosting exporter profits in the dollar and euro. Therefore, an interest rate hike is also intended to help stop the yen from falling further.
In a speech to business leaders in Saitama, just north of Tokyo, on Aug. 27, BOJ Deputy Governor Ryozo Himino basically repeated the official line that was communicated through the latest policy statement and post-meeting remarks by Governor Kazuo Ueda.
“Given that underlying inflation has been approaching 2% and financial conditions have been accommodative, I believe the bank should continue to raise the policy interest rate and adjust the degree of monetary accommodation in accordance
with developments in economic activity, prices, and financial conditions,” Himino said.
He said the BOJ board will consider the timing and pace of rate adjustment “by examining the likelihood of the baseline scenario of the outlook for economic activity and prices being realized, and the risks to the outlook, including the impact of the situation in the Middle East, the expansion in AI-related demand, and developments in foreign exchange rates.”
“If underlying inflation deviates upward to a level above the price stability target of 2%, that would have an adverse impact on the economy, and we should pay greater attention to the upside risk to prices than in the past,” he said. “In-depth deliberations should be held at each monetary policy meeting with these perspectives in mind.”
Later, in response to questions, Himino told reporters that “each policy meeting” would include the next meeting on Sept. 17-18 meeting. The board decided to leave the target for the overnight interest rate at 1% in an 8 to 1 vote in July after raising it from 0.75% in a 7 to 1 vote in June (the governor was absent for medical treatment).
The deputy governor also said he didn’t think there had been any major change in the bank’s risk analysis of three key inflationary factors: the weak yen, AI-linked demand and crude oil prices.
Himino’s comments on the latest economic data indicate that the bank’s leadership is not so concerned that a further rate hike would hurt growth despite disappointing Q2 GDP data that showed private consumption dipped 0.0% on quarter for the first drop in eight quarters and business investment in equipment and software slumped 1.2%. The economy posted third straight quarterly growth but it was much slower than expected at 0.3% on quarter, or 1.1% annualized.
“While it is certainly a point of concern that domestic demand in the GDP statistics appeared somewhat weak, I do not believe there is a need to change my view of the economic conditions; I consider these changes to be primarily due to technical factors,” Himino said.
The Cabinet Office explained in the government’s monthly economic report released on Thursday that lower school lunch fees that households paid contributed to the slight drop in private consumption but that it was offset by higher government spending on school lunches. It also noted that a transfer of large-scale patent rights overseas resulted in lower capital spending at home but that was counted as an increase in exports.
In the coming week, industrial production is expected to take a breather in July after three months of increase while retail sales are forecast to post a fifth straight year-on-year gain as the heat wave boosted demand for clothing and appliances. Household spending is set for an eighth consecutive year-on-year drop in July as consumers remain cautious amid elevated costs.
Monday, Aug. 31
0850 JST (2350 GMT/1950 EDT Sunday, Aug. 30) The Ministry of Economy, Trade and Industry releases preliminary July industrial output, the outlook for August, September.
Mace News median: -0.6% m/m (range: -1.4% to +1.3%) vs. June revised to +1.9% from +1.3%; +3.6% y/y (range: +2.6% to +5.4%) vs. June revised to +4.9% from +4.2%
Japan’s industrial production is expected to post its first drop in four months in July, down 0.6% on the month, in payback for a solid 1.9% gain (revised up from +1.3%) in June. It has some underlying strength backed by global demand for equipment to make memory chips amid the AI boom and the recent pickup in the auto sector. It is uncertain how overall production was affected by suspended auto and semiconductor factory operations for the last few days in July in light of a powerful earthquake in the southwestern Japanese region.
Last month, the monthly survey by the Ministry of Economy, Trade and Industry indicated that output would dip 0.7% on the month in July (adjusted for the statistics’ upward bias) before rebounding 4.5% in August.
The ministry has maintained its assessment that industrial output was “taking one step forward and one step back.” The last change was made in the July 2024 report, when it upgraded its view.
From a year earlier, production is forecast to mark its second consecutive increase, up 3.9%, after rising an upwardly revised 4.9% in June.
Monday, Aug. 31
0850 JST (2350 GMT/1950 EDT Sunday, Aug. 30) The Ministry of Economy, Trade and Industry releases preliminary July retail sales.
Mace News median: +2.5% y/y (range: +1.3% to +3.4%) vs. June revised to +0.6% from +0.5%; +1.6% m/m (range: +0.8% to +1.8%) vs. June revised to -3.9% from -4.1%
Japanese retail sales are forecast to post a 2.5% rise on the year in July for a fifth straight gain as hot weather after the rainy season lifted demand for air conditioners but the increase was partly limited by lower sales of fuels whose prices have been restrained by subsides aimed at easing the pain of high costs triggered by the Mideast conflict.
There is persistent solid demand for drugs and cosmetics from both domestic consumers and overseas visitors. Sales at department stores and supermarkets are also seen propping up overall retail sales.
Last month, the Ministry of Economy, Trade and Industry maintained its assessment after upgrading it in the May report, saying retail sales are “on an uptrend.”
Industry data showed department store sales posted their seventh straight year-on-year rise July, with the pace of increase accelerating from 2.3% in June thanks to the heat wave in the second half of the month that boosted sales of cool-touch T-shirts and sun-protection clothing as well as parasols and sandals. There mains strong demand from affluent customers for luxury brand bags and wristwatches. Summer holiday gifts and holidays also supported overall sales.
The weak yen helped sales to visitors from overseas mark their fifth consecutive increase in July, up 25.5%, after a 29.8% rise in June. Tourists from Hong Kong, South Korea and Taiwan led the gain. Spending by shoppers from mainland China rose about 5% after recording its first year-on-year increase in seven months in June, although the number of customers from China was still down 26% as many of them are bypassing Japan at the request of Beijing over bilateral diplomatic rows.
On the month, retail sales are forecast to rebound 1.6% after slumping a revised 3.9% in June for their first drop in four months.
Monday, Aug. 31
– The finance ministers and central bank governors from the Group of 20 industrialized and developing economies hold a two-day meeting in Asheville, North Carolina. Going forward, the G20 financial policymakers will meet at the annual meetings of the International Monetary Fund and the World Bank in Bangkok on Oct. 12-18.
Friday, Sept. 4
0830 JST (2330 GMT/1930 EDT Thursday, Sept. 3) The Ministry of Internal Affairs and Communications releases July household spending.
Mace News median forecasts: -2.4% y/y (range: -2.8% to -0.5%) vs. June -3.3%; +2.6% m/m (range: +1.9% to +3.3%) vs. June -6.4%
Japan’s real average household spending is expected to post its eighth straight year-on-year drop in July, down 2.4%, after falling 3.3% in June, as consumers remain cautious amid elevated costs for food and other essentials. On the upside, the heat wave boosted demand for air conditioners and summer clothing.
The weak yen has made imports more expensive while wage hikes amid labor shortages have prompted many firms to pass higher costs onto retail prices and the Mideast conflict has boosted transportation and packaging costs.
On the month, real average expenditures by households with two or more people are forecast to rebound 2.6% after plunging 6.4% in June. The seasonally adjusted expenditures index rose 3.7% in May to a 12-month high of 101.7.