Economy in Brief

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.

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.