Japan’s Consumer Confidence; Lowest Reading in 26 Months; Back Near 2022 lows, But Still Well Above Covid Lows

Consumer confidence in Japan in April slipped for all households as well as for the two-person household measure. The index level is now the weakest it's been since early-2023 with the all-household measure at an 8.2 percentile standing on data back to 2004 and the two-person household measure in about the same place, at its 9.4 percentile standing on data back to 2004. Consumers in Japan in April suddenly pulled back their expectations and significantly reduced their confidence.

The overall livelihood measure in April fell to 27.4 from 30.9 in March and an even higher level in February. Income growth slipped to 37.5 after reaching 38.9 in March and being higher still in February. Employment slipped quite sharply to 36.2 from 40.0 in March and from a slightly higher reading in February. People's willingness to buy durable goods fell to 24.2 from 27.4 in March. The March level was slightly higher than the reading in February; the decline in confidence also corresponded to a decline in the value of assets respondents hold; that reading fell to 34.3 from 40.7 in March and from 42.9 in February. Perhaps a good part of the degradation and expectations has to do with this drop in the value of assets.

On going drops- sharp declines in train Looking at changes across periods of three, six and 12 months, we see declines on all horizons for the all household and the two-person household measures. In fact, all of the components are consumer confidence our net lower over three months, six months and 12 months.

The declines month-to-month were extremely sharp. Over the last 253 months (over 21 years), the monthly drop in asset values has been sharper only once. The drop in the livelihood measure has been sharper only six times. The monthly drops are bottom ten events by count except for income growth and employment that are bottom 22 and 13 events, respectively. The headline drops are bottom ten ranking drops month-to-month as well.

Weak standings as well as sharp drops The rankings for the consumer confidence components are uniformly low. The strongest ranking is for employment that has a 24.5 percentile standing, in the lower quarter of its range. Income growth has a 20.4 percentile standing, at the border of the lower one-fifth amidst a historic range values. The value of assets has a 6.1 percentile standing with the willingness to buy durable goods at a 3.3 percentile standing; the overall livelihood metric has a 1.6 percentile standing.

Against this background, the standing for the overall confidence index is at its 8th or 9th percentile depending on which of the two overall measures you prefer to emphasize. Clearly the weakness in the survey is throughout the survey. As is the case with surveys in the United States, in Japan the relative strongest readings are for employment, that helps to hold the overall measure from getting as weak as some of its other components weaken. Since employment is an extremely important metric in consumer confidence, its stability helps to stabilize the overall measure. However, for Japan the employment metric, while the strongest of the lot, is still quite weak in the lower 1/4 of its historic ranking and data since 2004.

The BOJ In its just-concluded meeting, the Bank of Japan held rates but also cut its outlook. It's dealing with a situation where inflation continues to be over target and where the most recent inflation reading for the Tokyo area was disappointing including Japanese core inflation measure excluding fresh foods continues to run on the hot side of the target but for now it's not accelerating. With an outlook that in some sense piggybacks on the growth downgrades just issued by the IMF and World Bank, the Bank of Japan has also cut its expectations for growth and, of course, with growth weaker the central bank doesn't have to be quite as concerned about a current inflation overshoot. Not only is growth weaker but globally energy prices are still weakening, leaving plenty of room for a central bank to hold its fire on over-the-top inflation especially in an environment where growth is weakening.

Wait and see: a disappointingly correct approach Japan is still waiting to see what happens, where its tariff negotiations with the U.S. will go. There have been various rumors about what the U.S. will possibly request a higher value for the yen on foreign exchange markets. If that were to happen, Japan would likely be looking soon to rate reductions rather than increases, because the stronger yen would certainly help to provide further domestic pricing discipline. However, at the moment all speculation about tariffs is simply that. The U.S. has been very unclear about what it's seeking from its tariff policies both in general as well as bilaterally. Donald Trump or his team continue to talk about the potential usage of tariff revenues, but if the U.S. is seeking to reduce foreign tariff levels it is not going to be able to sustain high tariff levels in the U.S. as well. For the time being, markets look at the Trump administration rhetoric as being inconsistent, since it both talks about using tariffs to get foreign tariffs lower as well as using tariffs to generate tariff revenues in the U.S. and at one point suggesting that tariff revenue might be used to provide some tax relief for the middle class.

Summing up If following this discussion is confusing to you, then very possibly you're understanding the argument completely. U.S. tariff policy is confusing. It puts foreign policymakers and especially central banks in an awkward position because they don't really know what to expect next. In Japan, policy is marking time which is probably the safest thing to do. Inflation is running a little bit hot, but with some encroaching weakness in the economy, inflation is not likely to get out of hand. The Bank of Japan will continue to play the waiting game and wait for U.S. tariff policy to clarify itself and create an environment in which the Bank of Japan can make a reasoned decision about policy.