Economy in Brief

Money growth is accelerating across major monetary center countries with the exception of Japan. Three-month money growth is stronger than six-month money growth across all countries in the table except Japan; three-month money growth also is stronger than 12-month money growth across the table except in Japan.

Looking at money growth rates expressed in real terms, three-month money growth is stronger than 12-month money growth for all countries including Japan. However, that does not mean that money growth is strong; it just means that it's stronger than it was 12-months ago. For example, in the euro area, three-month money growth is still negative, as it is in the United States. However, the United Kingdom and Japan report non-negative values with U.K. money growth in real terms over three months at a 0.7% annual rate while Japanese money growth over three months expressed in real terms is flat. In all comparison, those yield accelerations.

EMU In the European Monetary Union, money growth has been accelerating from 12-months to six-months to three-months steadily. Credit to residents also has been expanding on that timeline as has private credit. Credit growth expressed in real terms also shows progressively improving growth rates from 2-years to 12-months to six-months to three-months. However, those increments are still small and on all those timelines credit growth is still contracting. It's just contracting progressively at a weaker pace.

The chart at the top shows how nominal growth rates of money supply had turned negative and have since been trending more toward zero with the exception of Japan where the money growth rate never really contracted but it edged down and since has stabilized.

Although inflation progress has slowed broadly, there has been little backtracking on the progress that inflation has made since coming down from its peak in these various countries. However, inflation is still above-target in these inflation-targeting countries and that remains a problem especially with the rate of change and inflation having slowed to a crawl. As of March of last year, inflation across these four countries on average still was accelerating. Deceleration began in April 2023. Prices fell the most sharply on average in October and November of last year when the average year-on-year drop for the 12-month inflation rate compared to one year-earlier was -4.4%. That average drop has pulled back to -2.9% April 2024. While that May still seemed large, let’s look more closely. In January, February and March, the average inflation rate that these four countries reported in each of these months was 3.1% and by April that had dropped to only 2.9%. For some countries, shorter trend inflation rates are showing a rising trend. The most recent trend gets more complicated, but all of these countries reached a recent low three-month inflation rate in January-2024 or November-23 or December-23. Compared to their respective lows, current (April 3-month) inflation shows an acceleration averaging 2.1% from those lows. This is not an argument intended to support the notion that inflation is accelerating, just to point out that deceleration has really run into a snag and the future is, therefore, less clear than it seemed at the end of 2023.

In the United States, there has been some backtracking of inflation, and although a few months ago the Fed seemed on a fast track to three rate reductions this year, the Fed has been backtracking furiously with a number of Federal Reserve officials scaling back their expectations for Fed policy this year and a number of private institutions no longer looking for Fed cuts at all from the U.S. in 2024.

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.

The U.K. industrial survey shows business optimism in the second quarter moving to a level of +9 from -2 in the first quarter of 2024; that's up even more sharply from a Q4 value of -15. The survey shows a sharp improvement in business optimism for the quarterly industrial survey.

U.K. export optimism improved even more sharply in the second quarter to a value of +7 from -20 in the first quarter. It had a reading of -15 in the fourth quarter of 2023. U.K. economy is logging sharply improved numbers in the second quarter.

Dividing the quarterly responses into those that are topical or that show changes compared to the last three months, the average reading in 2024-Q2 rises to +5 from -2 in the first quarter and zero in 2023-Q4. The forward-looking survey elements for expectations or 3-month ahead conditions log an average reading of 12, up sharply from an average of +1 in 2024-Q1 and from zero in 2023-Q4.

The table presents diffusion data in the form of ‘up-minus-down’ responses. In the second quarter, there are only 6 net lower responses after logging 13 in Q1 and eleven in 2023-Q4. Five of the six net negative responses in Q2 are in the category for topical data or for three-month changes experienced while only one is for the expectations or 3-month ahead categories. ‘Net foreign orders 3-months ahead’ is the only forward-looking category that is still negative in 2024-Q2.

The quarterly data show a total of six net negative readings in Q2, 13-net negative diffusion readings in Q1, 11-net negative readings in 2023-Q4 and 6-net negative readings in 2023-Q3; compared to these quarterly metrics, the annual average shows 11-net negative readings based on average diffusion responses. Percentile standing data calculated from net diffusion readings back to 1980 show a headline standing in the 78th percentile in Q2; that is up strongly from the first quarter standing that is only at its 57.5 percentile. There are sharp ongoing improvements.

The expectations readings for the Cap-Ex surveys show a jump to the 90.4 percentile in Q2 from the 17.8 percentile in Q1 for buildings, and to the 63.7 percentile in Q2 from the 28.8 percentile for equipment spending expectations. In Q2 there are only four entries with percentile standings below 50% (below their respective median on data back to 1980); only one of those is for forward-looking data and once again it is for the outlook for foreign orders. In contrast, there are eleven entries below their 50th percentile standing based on the Q1 data illustrating the substantial improvement that has been made in one quarter The standings for new order and domestic orders are sharply higher in Q2 (but still below median). While foreign orders ahead also improve their standing in Q2, the margin of improvement is small.

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.