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Economy in Brief

Japan's Retail Trends Remain Weak
by Robert Brusca  May 16, 2016

Japan's retail sales rose by a seasonally adjusted 1.5% in March as NSA nominal sales fell sharply. Seasonally adjusted sales are falling fast over three months and six months as well as declining over 12 months. The speed of the decline has accelerated slightly over three months even with the sales rebound in March. Not seasonally adjusted sales are lower. Sales are weak over the last 12 months despite the horrendous weakness they posted over the previous 12 months.

Retail sales are exceptionally weak in the just-completed quarter, falling at a nearly 9% annual rate in nominal terms. Consumer confidence, in its diffusion format, continues to mark a long string of weakening with its reading persistently below its neutral mark of 50. The confidence gauge was last at or above 50 in February 2006 - over one decade ago. The expression `been down so long it looks like up to me' may apply. The current 41.7 diffusion reading for confidence stands in the 68th percentile of its historic queue of data back to February 2006. That's not a bad relative standing, but it is still a poor absolute reading.

Japan continues to underperform. Its price level continues to be weak or to drop. Japan's CPI obtained positive price traction from late 2013 through May 2015. Since then, the price level has lost its upward momentum and has been essentially flat. Retail sales trends in Japan since early 2015 have been steadily eroding. Now Japan's Prime Minister Shinzo Abe is reported to be putting the next scheduled hike in the consumption tax on hold because the economy is not strong enough to absorb such a tax hike.

Meanwhile, Japan is under pressure especially from the U.S. not to pursue a weak yen policy. However, a weak yen does not benefit Japan as much as it did in the past because so much output has been outsourced by Japanese firms. A weak yen also tends to raise domestic prices and can be a setback to domestic consumption trends especially with Japan's nuclear plants shuttered and with its dependency on oil imports relatively high.

Japan is most affected externally by weakness in China, its largest trading partner. Over the weekend, new economic reports from China were disappointing. Industrial output gains undershot their forecast and retail sales were weaker than expected.

Abe's apparent decision to mothball the consumption rate hike can hardly be surprising in this environment. Even though the prospect for a weak yen to aid Japan's exports is limited, there is also a limited tolerance for foreign exchange manipulation in this environment. There is not enough demand growth overall globally. The prohibition on foreign exchange manipulation is meant to keep countries from gaining an unfair competitiveness advantage in this time of slack demand. That is not a policy solution, but it is meant to keep countries from passing their own problems to other nations in a high-stakes potentially escalating game of hot-potato. Despite these manipulation prohibitions, exchange rates continue to fluctuate.

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