By Max Sato
(MaceNews) – Here are the key Japanese economic events for the coming week.
President Trump’s high import duties have prompted Toyota and other carmakers to trim sales prices for U.S. buyers in a bid to protect their market share in the world’s largest economy. This has led to a fall in overall Japanese export values in recent months and the same picture is expected for the July trade data.
On the upside, core machinery orders, a leading indicator of how firms are planning to implement their capital investment plans, are forecast to rebound in June, limiting their second quarter decline close to zero.
Consumer inflation is expected to ease further in July to just above 3% in key measures, thanks to retail gasoline subsidies and the yen’s rise from last year’s slump that has lowered import costs and sparked a pullback in inbound spending.
On the political front, Prime Minister Shigeru Ishiba has taken the initiative to reverse the government directive, setting the stage for allowing rice farmers and firms to grow more rice in a desperate bid to cool off the recent surge in the prices of the national staple. This should be reflected in the CPI data in coming months.
The bottom line is unchanged: The Bank of Japan is still in the gradual process of normalizing its accommodative policy stance that had kept short-term interest rates in a range of zero to slightly negative until March 2024, when it conducted its first rate hike in 17 years and ended the seven-year-old yield curve control framework.
– Wednesday, Aug. 20
0850 JST (2350 GMT/1950 EDT Tuesday, Aug. 19) The Ministry of Finance releases July trade.
Mace News median: exports -2.0% y/y (range: -3.5% to -1.0%) vs. June -0.5%; imports -10.0% y/y (range: -11.1% to -7.3%) vs. June +0.3%; trade surplus ¥145.85 billion (range: a deficit of ¥80.60 billion to a surplus of ¥326.10 billion) vs. a revised ¥152.12 billion surplus; ¥628.34 billion deficit in July 2024
Japanese export values are forecast to post their third straight year-on-year drop in July, down 2.0%, after slipping 0.5% in June and marking their first decline in eight months with a 1.7% dip in May. Japanese carmakers are reducing the prices for U.S. customers to cover high Trump import tariff costs and thus to protect their market share, exerting downward pressures on overall export prices, but the volumes of Japan’s exports to the world have been on an uptrend.
The decline in July export values is expected to be led by automobiles, iron and steel and auto parts as the protectionist U.S. trade policy is taking its toll on freer global flows of goods.
Import values are expected to slump 10.0% after marking an unexpected rise in June (+0.2% vs. consensus -1.5%) and falling 7.7% in May. The decrease is seen driven by continued declines in prices for crude oil and coal as well as in payback to recent higher drug purchases.
As a result, the trade balance is forecast to post a surplus of ¥145.85 billion following a downwardly revised ¥152.12 billion surplus in June, which was the first black ink in three months. It would compare with a ¥628.34 billion deficit recorded in July 2024.
– Wednesday, Aug. 20
0850 JST (2350 GMT/1950 EDT Tuesday, Aug. 19) The Cabinet Office releases June, Q2 machinery orders.
Mace News median: core orders +1.5% m/m (range: -1.8% to +4.5%) vs. May -0.6%; +6.8% y/y (range: +1.4% to +9.1%) vs. May +4.4%; -0.2% q/q vs. Q1 +3.9%, official projection -2.1%
Japanese core machinery orders, the key leading indicator of business investment in equipment and software, are forecast to post their first increase in three months in June, up 1.5% on the month, led by continued solid demand for computers in a move to digitize operations amid widespread labor shortages. It would follow a slight 0.6% dip in May, a 9.1% plunge in April and a 13.0% surge in March.
In the April-June quarter, the core measure is forecast by economists to show a slight 0.2% dip on quarter after rising 3.9% in January-March and rebounding 2.3% in October-December. It would be firmer than the official projection of a 2.1% drop.
Last month, the Cabinet Office maintained its assessment for the sixth consecutive month, saying, “Machinery orders are showing signs of a pickup.”
From a year earlier, core orders, which track the private sector and exclude volatile orders from electric utilities and for ships, are expected to mark their ninth consecutive gain, up 6.8%, following a 4.4% rise the previous month.
– Friday, Aug. 22
0830 JST (2330 GMT/1930 EDT Thursday, Aug. 21) The Ministry of Internal Affairs and Communications releases July CPI.
Mace News median: total CPI +3.1% y/y (range: +3.0% to +3.3%) vs. June +3.3%; core CPI (ex-fresh food) +3.1% y/y (range: +3.0% to +3.3%) vs. June +3.3%; core-core CPI (ex-fresh food, energy) +3.4% y/y (range +3.3% to +3.4%) vs. June +3.4%
Consumer inflation in Japan is expected to ease further in July to just above 3% in key measures, thanks to retail gasoline subsidies and the yen’s rise from last year’s slump that has lowered import costs and sparked a pullback in spending by visitors from overseas who lost their currencies competitive edge against the yen.
The impact of slowing overall energy price gains (gasoline has been down) was mitigated by elevated processed food prices despite gradually easing domestic rice supply shortages (regular rice still costs nearly double the price seen a year earlier) as well as higher mobile phone charges.
The core reading (excluding fresh food) is forecast to post a 3.1% rise on year in July after its annual rate decelerated to 3.3% in June from 3.7% in May. The year-on-year rise in the total CPI is also seen at 3.3%, easing further from 3.3% in June and 3.5% previously. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is estimated at 3.4% after rising to a 17-month high of 3.4% from 3.3%.
The consumer price index for Tokyo’s 23-ward area, which tends to work as a leading indicator of the national average CPI as it is released about a month earlier, has shown price-cutting factors unique to the core metropolitan area in the past year or so.
For instance, the core measure (excluding fresh food) of the Tokyo CPI plunged to a 25-month low of a 1.6% rise on the year in April 2024 from 2.4% in March. Without the price-cutting effect of free high school education (minus 0.51 point), the core CPI would have shown a 2.1% increase. Meantime, the national core CPI rose 2.2%, down more gradually from 2.6% previously.
The national government had been providing subsides to slash high school tuition fees but the Tokyo prefectural government added its own financial support, removing the upper limit on household income from eligibility conditions and effectively making all public and private tuition free for grade 10 to 12 students. This policy difference generated a clear base year effect, keeping the Tokyo CPI year-on-year rise at least 0.5 percentage point below the national average for 12 months.
This year the Tokyo CPI saw a 34.6% plunge in water bills in June, pushing down the central area’s total CPI by 0.24 point, after being flat previously, owing to the metropolitan government’s free base charge for four months that began in June. The impact of this policy shift was diluted in the national average, which recorded a modest 2.3% fall in the same month, trimming its total CPI by just 0.02 point.
Conversely, the national government’s renewed subsidies for gasoline and heating slowed the year-on-year gain in overall energy prices to 2.9% (+0.23 point contribution) in June from 8.1% (+0.63 point), creating a gap of 0.40 point in contribution rate between the two months.
That was more than what energy costs in the Tokyo’s 23-ward area did to the metropolitan core CPI: +3.6% (+0.19 point) in June vs. +8.7% (+0.45 point), generating a narrower gap of negative 0.26 point.
Counting in both the water bills and gas station prices, the downward move in consumer prices was similar between the two sets of indicators: the core Tokyo CPI decelerated to 3.1% in June from a 28-month high of 3.6% in May while the national core eased to 3.3% from a 28-month high of 3.7%.
On the political front, Prime Minister Shigeru Ishiba has taken the initiative to reverse the government directive, setting the stage for allowing rice farmers and firms to grow more rice in a desperate bid to cool off the recent surge in the prices of the national staple
Domestic rice prices are easing slightly but still nearly double the levels seen a year earlier in the aftermath of protracted supply shortages caused by last year’s bad weather and decades-long government policy to reduce rice harvesting areas aimed at supporting the prices of the staple for famers.
As mentioned in this column before, the current consumer price rises are not fully backed by domestic demand but largely pushed up by higher import costs. As CPI data have shown in recent months, wage-heavy services price hikes still lag far behind goods price gains.
This means that it is not accompanied by sustained and substantial wage growth and that underlying inflation is still below the Bank of Japan’s 2% target. Yet the bank is still in the gradual process of normalizing its accommodative policy stance that had kept short-term interest rates in a range of zero to slightly negative until March 2024, when it conducted its first rate hike in 17 years and ended the seven-year-old yield curve control framework.
At its last meeting on July 30-31, the Bank of Japan’s nine-member board voted unanimously to maintain the target for the overnight interest rate at 0.5% for the fourth straight meeting after hiking it by 25 basis points (0.25 percentage point) in January amid uncertainty over trade rows.
The bank repeated that it will continue raising rates if growth and inflation evolve in line with its medium-term outlook but it is still in the process of normalizing its monetary policy stance from years of keeping short-term rates near zero percent.
Governor Kazuo Ueda told a post-meeting news conference that the uncertainty over tariff rates had eased but it was still highly likely that the Trump administration would impose stiff tariffs, which makes it uncertain how the effects of those duties on imports to the key U.S. market will pan out.
“The inflation rate has been moving above our outlook for some reason but I don’t think we are falling behind the curve, nor do I believe the risk of doing so is high,” Ueda said.
For the rest of the year, the board is scheduled to hold policy-setting meetings on Sept. 18-19, Oct. 29-30 and Dec. 18-19.