Japan's Retail Sales Rebound in June; But Is That Meaningful?

Japan's retail sales have turned volatile, as the chart shows. The three-month growth rate in sales is more volatile than it has been since mid-2016. All that means is that it is harder for us to identify and pin down trend. And we would really like to identify and pin down trend as global conditions get topsy-turvy and as the weakness in Turkey's exchange rate has apparently spread to Indonesia. I guess time isn't the only thing that flies.

Beyond Japan's retail sales...far beyond
As markets try to puzzle out what is going on in Turkey, they are going to go through a progression of questions. Who does Turkey trade with? Who lends to Turkey? Who lends to Turkey's banks? Who will get hurt if Turkey goes jerky? And so on. Another of those thought experiments is who ‘looks like' Turkey? As markets go through their check points, you may recall the Asian financial crisis that began with the Thai baht getting bashed and a famous market commentator saying who cares about the Thai baht? Well, before too long, people cared about the Thai baht. The currency market is the bloodstream of international trade and blood-borne diseases are contagious and to be feared. They can and do spread and sometimes do so in unexpected ways. There's no a time to be nonchalant with things you might not fully understand. It's really time to try to see where the market is going with all this and to get out in front of it. The vanguard can be a scary place to be, but it is better to be there than to be inactive and waiting for the final result or the knock-on impacts. Asia is being drawn into this orbit of unease and that is not good for Japan.

Growth in China is already under pressure as the Trade War impact is biting. And China is Japan's main trading partner. Growth in Japan would be affected if China slows. And then if some sort of financial crisis or exchange rate turbulence spread to Asia, I could get much worse for Japan whose domestic options already are limited. And why might market unrest spread? Turkey and the U.S. are at policy loggerheads and the U.S. has had other policy spats as well. Any one of them might mushroom into something more....

Japan for now...
For now Japan's retail sales look solid. They are less dependable because of the volatility, but still the thrust of sales shows more strength than weakness. Sales rose by 3.6% in April, fell by 2.3% in May and then gained 1.3% in June. The three-month growth rate is now at a 10.5% annual pace, up from a pace of -0.6% over six months and up from 1.7% over 12 months.

Sales, however, are not underpinned by a lot of improvement in consumer confidence. The confidence metric in June stands at 43.7, the same as its quarterly average and up from a year-ago mark of 43.3. Confidence is up in June by 0.4% from its 12-month average. None of these moves are particularly impressive. However, in the quarter–to-date, which now refers to the just completed second quarter, the recent volatility in sales growth rates does add up to an expansion at a 6.3% annual rate.

The bottom line on this is that future sales growth will not stem from trend as much as from employment and wage developments and all of this is wrapped in a cloak of some sort of confidence. For now Japan's job growth and wage growth are more or less steady. But it is the outlook that is uncertain and that goes for more than just Japan since the global trade framework is being shaken.

The geopolitical background is uneven and there are a lot of global hot spots. Donald Trump's ‘scorched earth' methodology of ‘diplomacy' has created at least some unrest almost everywhere. Neither friend nor foe has been spared as the President has worked to reset global responsibilities and realign U.S. trade interests in a way that he thinks will be fairer to the U.S. Of course, everyone else was more or else comfortable the way things were so this series of changes is stirring up a lot adverse sentiment. But the counterpoint is that this is what ‘America' wanted in some sense and it is why a nonpolitician like Donald Trump was elected.

The New Global framework: Danger- under construction
There is almost no foreign theme that you can name that is going to play out without reference to how it will collide with U.S. policy in this new global environment. Start out talking about Japanese retail sales prospects and you wonder about jobs, incomes, inflation trends, China, North Korea and the list goes on. There are a lot of balls in the air that might yet have a meaningful and positive impact on the outlook although most people seem to be holding their breath about the prospect that one of more of these balls gets dropped. The U.S. stand on Iran is very unpopular and there is lingering skepticism on North Korea. What we have seen out of U.S. foreign policy is that Mr. Trump is willing to be bold and brash and also willing to backtrack and re-set, under his own terms. He does not admit defeat, but he will change tactics. This is like your GPS device that might find you going in the wrong direction, but can still reroute you to your final destination with a few extra turns here and there. Starting out, even in the wrong direction, is not lethal. So we are on the GTS or (Global Trump System) and it is taking us for a ride that does not always wind up where you might think based upon the journey's start. We will have to hold on and see where it takes us. In the meantime no trend is safe from this bumper-car ride. Japan's retail sales are only one of the variables that will hang in the balance on what U.S. policy does. But it is not just the U.S. It is also how flexible or inflexible other countries are about re-setting new true post war relationships. Europe is still being coddled by the U.S. (special trade treatment and the U.S. carrying NATO on its back are examples) and Trump's view is that Europe should take off the training wheels and fend for itself but still be an ally. Europe can't understand why we won't donate a pint of blood for it every month as we used to. The question for Europe is this: does that work for you? Asia has a whole different slate of issues. But it's all in play.