Japan's PPI Declines in May

Over the last 10 years, Japan's PPI has had a nice tracking relationship with Japan's CPI. Of course, the PPI is more volatile than CPI inflation, with PPI inflation rising faster than CPI inflation when inflation is rising and falling faster than CPI inflation when inflation is falling. During this period, the PPI can explain about 47% of the variance in the CPI.

However, recently the CPI has been resisting the charms of the PPI. From early-2015 until late-2016, the PPI was falling at pace of up to a 4% annual rate while the CPI stayed close to home while dropping at a pace no greater than one-half of 1% per year. Now the PPI is up to 2% per year and the CPI is dawdling at a year-over-year pace of about 0.4%.

Obviously the PPI has been kicked around by oil prices. Over this period oil explains about 32% of the variance in the PPI. The table shows that episodes of PPI decline line up with episodes of Brent oil price declines.

In the merry month of May the PPI is falling by 0.3% after ticking up in April and falling in March. There is no clear acceleration/deceleration pattern in Japan's PPI over the past year. Among the PPI categories, only the capital goods sector shows any trend and for it there is a mild uptrend with inflation flat over 12 months then rising at a 1.2% annualized pace over three months. In general, there is nothing here to make the BOJ think that it is winning its battle to boost consumer inflation to 2%.

In the quarter-to-date, the PPI is falling at a 1.2% annual rate with consumer goods prices (at the producer level) falling at a 2.2% annual rate as intermediate and capital goods prices are advancing at a 0.5% annualized pace in Q2.

And in Q2, Brent prices are still falling (so far).

In a separate report today, Japan revealed that core machinery orders fell by 3.1% in April. A gain had been expected. Even though the core orders series is designed to omit the lumpiest series, it is still a relatively volatile report. Total foreign orders showed a sharp rise in April gaining 17.4% while domestic demand shriveled at a 3.6% pace. Year-on-year total orders are up by 2%, core orders are up by 3.6%, foreign orders are up by 8.8% and domestic orders are lower by 1.7%. There is some strength in the order series, but it is not from domestic demand. Japan's economy is having a hard time getting into gear and growing steadily enough to generate the inflation targeted by the BOJ.