Japan: Solid growth and tight labour market conditions - HSBC

Solid growth and tight labour market conditions continue in Japan, according to analysts at HSBC. However, the lack of wage growth has kept underlying price pressures low in the economy and this disconnect has been even larger than HSBC had expected, they further add.

Key Quotes

“Consequently, we raise our growth forecast but lower our inflation forecast. We expect real GDP to grow 1.5% in 2017, an increase to our previous forecast of 1.3%, while we estimate inflation to be 0.5% for this year, instead of our earlier expectations of 0.9%. In terms of monetary policy, low inflation should keep the BoJ inclined to maintain its extremely loose policy stance. On that basis, we think the bank will keep its 0.0% target on the 10yr JGB through its yield curve control (YCC) programme.”

“Real GDP increased 0.6% q-o-q sa in Q2 2017, accelerating from 0.3% in 1Q17. This marks the sixth consecutive quarter of growth in Japan, which is the longest expansionary period since 2006. Public demand led the acceleration in growth, rising at its fastest pace since 2012, while private demand was also firm, with both consumption and business investment rising on a quarterly basis. However, growth is likely to slow in the coming quarters, as the boost from exports comes off the boil and private consumption growth dragged by limited wage gains.”  

“Labour market conditions have remain extremely tight. The seasonally adjusted unemployment rate stood at 2.8% in July, the lowest level in more than two decades, while the job-to-applicant ratio rose to 1.52 in July, a 43-year high. Tight labour markets have pushed part-time worker wage growth higher. On an hourly basis, HSBC estimates that wage growth has accelerated to 2.4% y-o-y in July. However, full-time wage growth actually declined 0.6% y-o-y in July. We argued that full-time wages are more closely tracking potential growth dynamics than cyclical tightening in labour markets. Adding the two together, average monthly cash earnings have actually declined 0.3% y-o-y in July, according to preliminary estimates.”

“Inflation is still a long way short of the BoJ's price stability target of 2%, with consumer prices increasing 0.4% y-o-y in July. However, headline price gains remained positive, mainly due to higher energy prices on a y-o-y basis. If excluding fresh food and energy products, core inflation only edged up 0.1% y-o-y in July. All in all, underlying prices pressures continue to be weak, which mainly reflects sluggish wage growth.”