Haver Analytics
Haver Analytics

Economy in Brief

In this week's newsletter, we assess the recent trends and factors shaping Japan's balance of payments. Notably, Japan has witnessed a substantial improvement in its current account surplus in recent months, with an improved goods balance a primary driver. We attribute Japan's improved goods balance in part to a favorable trend in its terms of trade, although we also acknowledge the rise in export volumes for certain key products. Additionally, we highlight Japan's significant net primary income flows, which have played a crucial role in bolstering its current account balance. These substantial primary income flows are arguably a consequence of Japan's long-standing accumulation of overseas assets through both direct and portfolio investments.

This discussion naturally leads us to Japan's substantial net international investment position, which stands as the largest globally. Upon closer examination, we observe a pronounced shift within Japan's investment portfolio, with direct investment holdings progressively displacing its portfolio investment holdings in relative significance. Lastly, we explore recent patterns in Japan's outbound direct investment flows, with a pronounced increase in investments directed towards the US. In contrast, investments into China and the European Union have experienced a downturn in recent times.

Japan’s current account Japan’s current account surplus has surged since early 2023, surpassing 25 trillion yen ($160 billion) in March 2024 on a rolling 12-month basis (Chart 1). A significant portion of this improvement stems from the easing of its goods trade deficit, which decreased to about 3.6 trillion yen ($23 billion) over the period. Concurrently, Japan’s net primary income has remained the primary driver behind the economy’s overall current account surplus, hovering around 35 trillion yen ($220 billion) in recent months. This unique characteristic distinguishes Japan from many other Asian economies, where goods and services exports typically play a more dominant role in current account inflows.

More Commentaries

  • Inflation in Japan rose by 0.2% in April after 0.3% in March. The CPI excluding fresh food was flat after rising 0.1% in March. The core of the CPI calculated excluding energy and fresh food was flat in April. Calculating the core excluding all food and energy leads to rise of 0.2% in April.

    Inflation, broadly expressed, in April, is weak and weakening although it's not fully reflected in the sequential rates of inflation. The headline CPI rises 2.5% over 12 months, gains at a 1.1% annual rate over six months, then elevates at a 1.9% pace over three months. However, for the whole CPI excluding fresh food, there's a 2.1% gain over 12 months, a 1.1% annual rate gain over six months, and a lower 0.4% gain over three months. For all items excluding food and energy, the 12-month inflation rate is 2%, decelerating to 1.2% over six months and holding at that same pace over three months. But the core reimagined with fresh food eliminated along with energy rises by 2.4% over 12 months, at a 1.3% annual rate over six months, and eases further to a 0.8% annual rate over three months.

    These progressions show the headline inflation rate roughly holds to Japan’s target of about 2% inflation. Over 12 months, the inflation rate is still too high at 2.5%; however, progressively, inflation is coming down as over three months; it holds close to the 2% target running at 1.9%. However, for the other metrics excluding food or fresh food or both fresh food as well as energy, we find inflation is decelerating more rapidly. At 12 months, all the other measures are copacetic. All the 12-month inflation rates are at or above the Bank of Japan's 2% target, but moving inside that time frame to six-months, the inflation rates are under 1 ½% and moving down to the 3-month span inflation rates are still below 1 ½% and several of the key rates are even below 1%.

    These trends would seem to make it more difficult for the Bank of Japan to exercise the rate hikes that it would like to exercise to normalized monetary policy as it has been intending to do. Also, the weak yen does not yet appear to have stoked domestic inflation and the Bank of Japan has been using intervention to try to keep the yen from weakening but a more fundamental prop for the yen would be for it to raise interest rates - although the inflation statistics don't seem to allow much of that. Still, there may be a question of whether the week yen still is going to feed through into domestic inflation and provide the Bank of Japan more support for further rate hikes… so far, the data do not contain that element.

    The quarter-to-date inflation data continue to show these same issues with inflation. The all-item inflation rate is at 2.3% while the inflation rates for the other metrics are below 1 ½% annualized. The quarter-to-date inflation rates are nascent calculations since April is the first month of the second quarter; starting the quarter out with such weak inflation especially with the other-than-headline measures ending the first quarter on a weak note, imparts weak momentum to inflation.

  • In the absence of top-tier economic data, corporate earnings reports, particularly from the technology sector, have played a crucial role in shaping financial market sentiment over the past few days. And some very impressive revenue gains for companies that are producing AI-friendly semiconductors certainly have some macroeconomic parallels, as we illustrate in our charts this week via the equally impressive growth in South Korea’s semiconductor exports (see chart 1). Another noteworthy trend this week is the recent sharp decline in measures of European policy uncertainty (see Chart 2), which may have contributed to the recent improvement in UK economic data (see Chart 3). The improving economic data and the series of positive surprises within the UK might have factored into the timing of the Prime Minister Sunak’s decision to call an election on 4th July. However, persistent UK service sector inflation remains a challenge, as highlighted by the latest CPI report for April (see Chart 4). Additionally this week, we note the sharp rise in copper prices in recent weeks, a trend potentially linked to the rollout of AI technology, though supply-side disruptions are an equally likely cause. The green energy transition could also be impacting copper demand, which chimes with some data on renewable energy sources in our final exhibit this week (see Chart 6).

    • Sales are down versus early last year.
    • Regional sales are mixed.
    • Median sales price eases
    • May Composite Index at -2 reflects negative readings in new orders (-13) and production (-1), while employment (9) expands to the highest level since Mar. ’23.
    • Price indexes increase, w/ both prices paid (19) and prices received (7) up to a four-month high.
    • Expectations for future activity grow modestly, w/ prices paid (40) continuing to rise at a faster pace than prices received (26).
    • Index is lowest since January.
    • Component declines are broad-based.
    • New claims filed fell to 215,000 in the week of May 18 from 223,000 the previous week.
    • Recent reading is about the same as the 52-week average prior to the pandemic, indicating that the labor market is still rather tight.
    • Continuing claims rose slightly but have been little changed throughout most of 2024.
  • The S&P flash PMIs for the composite manufacturing and services gauges for seven early-reporter units (6 countries) including the European Monetary Union show more weakening conditions than strengthening conditions in May. Looked at by reporting unit, manufacturing has improved in every single reporting unit on a month-to-month basis; however, in six of the seven units, the services sector was weaker and since the services sector is having a bigger impact on the composite for these six reporters, the composite, and the services index both weakened. The U.S. is the exceptional reporter that had a strengthening in all three gauges: the composite, manufacturing, and services.

    Part of this reflects a reversal from April when fourteen of these gauges improved and seven deteriorated (three gauges per reporting unit across seven reporting units). And in May there were only 5 gauges that were weaker compared to 16 that were stronger. The monthly data had been showing more improvements until May.

    Quarterly data repeat this process with five of these gauges weaker over three months compared to 16 stronger. This is a reversal of the six-month pattern in which 16 gauges were weaker and only five were stronger- and that's the same condition that prevails over 12 months. So, we find ourselves in a transitional 3-month period where things are getting stronger; however, in May at the end of this string, we find a reversion to previous conditions of having more weakness than strength. This simply means that we must keep a close eye on these events to see if we're seeing a slowdown in the recovery process or a termination of the recovery process and a reversion to weakness.

    The percentile standings tell us where the current indexes stand relative to their position over the last 4 1/2 years. On this basis, the percentile standings executed on the queue standing basis show 10 of the 21 gauges have standings below the 50% mark which puts them below their historic median for the last 4 1/2 years. However, weakness is concentrated in France and the United Kingdom, two countries that have all sectors below the 50-percentile mark. Japan is the only exception to have all gauges above the 50-percentile mark. The most general observation is that the composite index and the service sector index have percentile standings in their 60th percentiles, with manufacturing at some standing level below its 50th percentile usually around its 40th percentile or lower. The unweighted average standing for the group has the composite with the 59-percentile standing, the average with the 38.6 percentile standing, and services at a 61.4 percentile standing. Excluding the U.S. from this unweighted average, we find little changed with the average at 59.1% for the composite, at 38.7% for manufacturing and at 61.3% for services. The U.S. has standing statistics that are just about at the average for this group.

    The chart shows that recent momentum has been improving at least in the European Monetary Area. However, the current month shows a set-back and the most recent three months show improvement after six-month and 12-month averages that were considerably weaker. The question on the table is whether this improvement is continuing or whether it's slowing down or running out of gas. Central banks had been raising rates during this period, and - more recently- have stopped. And they have not for the most part shifted to a policy of easing although several of them seemed to be poised to take that next step. The next step the central banks take is going to depend a lot upon how inflation performs and inflation performance, which had been positive and constructive during most of this period, has since slowed, or begun to make some small reversals. That leaves a question mark about what central bank policy will be and that in turn leaves a question mark about how growth will unfold.

    • Sales decline to three-month low.
    • Home prices continue to strengthen.
    • Sales decline throughout country.