Economy in Brief: 2023

The CPI in Japan in November fell by 0.1% with the closely watched CPI excluding fresh foods up by 0.1%. The all-item CPI rose by 2.8% year-over-year as the metric excluding fresh food was up by 2.5%. The CPI for all items excluding food and energy rose by 2.8% over 12-months. And that core measure of the CPI shows a steady deceleration in Japan's inflation rate from 2.8%, to 2.2% over 6-months to 2% over 3-months.

That progression, however, does not necessarily end of the debate on Japan's inflation rate. Japan’s concerns on the pace of inflation run deeper than just some three-month inflation progression. Inflation in the services sector in Japan continues to spread, a well-known problem for inflation since goods sector inflation tends to be more responsive in the short run and service sector inflation tends to be stickier. Goods sector inflation also tends to be lower because international competition in the goods market keeps prices in line; whereas services are wholly a domestic sector as there are few items in the services area that are subject to any kind of international competition.

A key issue in Japan has been where inflation would be settling. Before COVID struck Japan had been struggling with a long episode of weak prices and deflation stemming from various shocks and a shrinking, aging, population that fostered declining domestic demand. The Bank of Japan has been one of the few globally important central banks to express concern about its consistent missing of its target before COVID. The Bank of Japan was consistently undershooting its target and it was concerned about what that would do with its credibility. In contrast the Federal Reserve has been over its target for over 2 1/2 years following period of chronically undershooting in a more modest way. The Fed only talks about how it remains committed to its 2% target and never entertains for a minute the notion that its credibility might be undermined by its persistent missing of its target and its slow return to its target range.

After Covid the Bank of Japan wound up facing a different world where its inflation rate eventually rose. However, that didn't convince anybody because, in the US, the Federal Reserve called inflation ‘transitory’ when in fact it turned out to be still accelerating and sticky. The Bank of Japan didn't so much take a position on what inflation would do, as it became skeptical and wanted to watch the development of inflation closely to see what kind of monetary policy would be appropriate based upon how inflation was developing. Its long run of weak prices, concern about deflation, and the modest nature of the inflation it faced, all combined to give the BOJ policy flexibility.

The chart shows that Japan's core inflation rate never rose as much as inflation increased in the United States or in Europe. And while the inflation rate in Europe and in the US has come down, the inflation rate in Japan has only risen more modestly and transitioned into a plateau where inflation has been steady, based on the core rate. In the US, the core rate has slowed its transition to a lower pace while in Europe the core rate continues to drop at a relatively rapid pace.

As a result of these developments Japan finds its core inflation rate more or less in the same situation as other major money center central banks. Japan is no longer the outlier with deflation although the future remains unclear. Current developments in Japan's inflation trends seem to suggest an inflation in Japan is going to be a little bit stickier in the post Covid world than it was in the pre-Covid world. The Bank of Japan, which has had extraordinary policies in place and has engaged in a policy of yield curve control, is anticipating transition back to more normal ways of making monetary policy. The international financial community is focused on when this transition is going to occur. The more normal Japanese growth and inflation begin to look and the less distressed the situation appears, the more likely that the Bank of Japan will make this transition sooner rather than later.

And that's what it looks like is developing. It's beginning to look like the inflation picture in Japan is transitioning to something that is more normal globally and the Bank of Japan will soon be able to transition to a more normal monetary policy and drop its extraordinary policy of yield curve control. Along with this the BOJ will be able to transition monetary policy to a more normal level of rates and begin to hike rates to that end. To make this decision central banks are always focused on market expectations. And the case of Japan, something called the spring wage round will be key in determining what inflation expectations are like. The Bank of Japan will be able to see what bargaining between labor and management produces in terms of a wage rate. That will help to determine not just what inflation expectations are, but the pressures that will exist on inflation for the period ahead.

The Distributive Trades Sector - Distributive trades weakened in the UK in December. The responses are from a survey by the Confederation of British Industry (CBI). It logged a -32 response as an assessment of year-over-year sales in retailing in December, down from -11 in November. For wholesaling, the index for sales compared to a year ago also fell to -24 in December from -11 in November. The guidance or the estimate for sales expected in January compared to a year ago registered -41 for retail and compared to -6 in December. The same outlook for wholesaling registered a - 18 in January compared to -4 in December. Sales as evaluated in December or sales expected in January in both retailing and wholesaling show substantial weakness as well as weakening on a month-to-month basis. The picture is clear: conditions are weak; there are no caveats.

Retailing Currently reported - Looking at retailing beyond sales, orders, compared to a year-ago, register -54 in the survey for December compared to -22 for November. Sales evaluated for the time of year register -25 in December compared to -16 in November. All of these survey signals point to weakness and deepening weakness. The queue ranking of the December observations has sales at a 6.7 percentile standing, orders at a 1.4 percentile standing, and sales, adjusted for the time of year, at a 15.5 percentile standing all are extremely weak standings.

Expectations for January - I've already mentioned expected sales compared to a year ago that are sharply lower in January compared to December. Orders in January compared to a year-ago slipped a -29 reading from -26 in December, a modest weakening. Sales for the time of year weakened much more sharply in January, to - 37 from -15 in December. The rank standing of these three metrics finds sales for a year-ago in January at a 3.2 percentile standing, orders at a 7.4 percentile standing, and sales for the time of year, at a 5.3 percentile standing - all of these quite weak.

Wholesaling Current reported - As noted, wholesale sales year-on-year fell sharply in December. Wholesaling orders compared to a year-ago also fell sharply with -36 reading for December compared to -8 in November. Sales for the time of year slipped to -6 in December from +16 in November. The standings for these three metrics find sales compared to a year ago with a 9.5-percentile standing, orders compared to a year ago at a 4.2-percentile standing, while sales for the time of year at a 22.2-percentile standing.

Expected in January - As noted, wholesale sales year-on-year fell sharply in January compared to December. Orders in January, compared to a year ago, slipped to -24 from -18 in December. Sales for the time of year in January slipped to -12 from +2 in December. Each one of these is weakening month-to-month. The queue rankings for these variables show sales at a 15-percentile standing, orders compared to a year ago at a 14-percentile standing, and sales for the time of year at a 16-percentile standing. Each of these represents a clear weak standing for each respective series.

Summing up The retailing and wholesaling survey data for December and for the expectations in January can all be lumped together as data that are weak. They are data that are weakening as well. The queue percentile standings are very weak for both retailing and for wholesaling and weak for the current results as well as expected results for January.

There are in this report lots of clouds and no silver linings. Distributive trades show weakening in the behavior of the UK consumer as determined by both the retailing and wholesaling merchants contributing to these surveys. Merchants are cutting back their assessment of activity, and their expectations for the period ahead. It may be too soon to say that it is time to batten down the hatches on growth expectations, but the ranking data are extremely weak and there's nothing on the horizon to provide any stimulus to these weakening trends. Inflation is making some progress in being reduced but the Bank of England continues to be vigilant and to be engaged in inflation fighting rather than having turned to the job of growth resuscitation. That has yet to happen in the UK. Current reported weakness is not deep enough to signal recession, but that signal could yet be in the works.