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World Economy

14

OPEC Monthly Oil Market Report – August 2017

Inflation

was lower again in June, increasing by only 0.3% y-o-y, compared to 0.4% y-o-y in May. Despite

tight labour markets, wages have only risen slowly in the past months and even fell by 0.5% y-o-y in June,

the latest available month. This certainly is also a concern and is keeping inflation from moving higher in

Japan. Core inflation (which excludes food and energy) even fell by 0.2% y-o-y in June for a second

consecutive month, but this was better than the minus 0.3% seen in April. Therefore, core inflation now

remains negative for the fifth month in a row, so low inflationary or even deflationary trends remain

persistent. The

unemployment rate

fell again in June to the extremely low level of 2.8%, compared to 3.1%

in May. Given this muted price environment, the BoJ revised its inflation target lower and now expects to

reach 2% inflation only at around 2019. This will be at a time when the sales tax is supposed to be lifted from

8% to 10%, which will naturally cause inflation to rise. The tax hike was postponed in the past years, so it

may not materialise again. The low inflation environment will also lead the BoJ to continue its monetary

policy and it is therefore expected to keep its overnight interest rates to a cap of minus 0.1% and 10-year

bond yields at about 0%.

Japanese exports

in June rose by 9.7% y-o-y, after an increase of 14.9% y-o-y in May, after already having

shown strong growth in the previous months of the year. The rise in exports was again very much supported

by exports of industrial goods and capital equipment, which mostly backed this positive trend in trade.

Additionally,

industrial production

continued its recovery, rising for the eleventh consecutive month, up by

4.9% y-o-y in June, after a rise of 4.7% y-o-y in May. This was supported again by a strong trend in

manufacturing, which climbed by 5.1% y-o-y in June, compared to 4.7% y-o-y in May. A continuation of the

positive trend is expected, when considering manufacturing orders, which rose by by 8.3% y-o-y in May, after

a rise of 2.0% y-o-y in April.

Some improvement was also reflected in

domestic demand

. Retail trade rose by 2.1% y-o-y in June, the

same level as in May. While the near-term development is uncertain, given the development in wages, it

constitutes a solid and rebounding trend from low growth in 2016.

Graph 3 - 2: Japanese retail trade

Graph 3 - 3: Japanese PMIs

The latest

PMI

numbers provided by IHS Markit confirmed a healthy trend, albeit a slightly declining

manufacturing index. It fell to 52.1 in July, after 52.4 in June and 53.1 in May. The services sector PMI also

slowed down a little bit, moving down to 52.0 from 53.3 in June.

The most recent developments confirm a solid underlying growth dynamic in the Japanese economy. This

has already been reflected in the 2017 GDP growth forecast of 1.4%. However, numerous issues persist,

and given the tight labour market situation and high capacity utilisation rates, further advancements in growth

seem challenging. Moreover the income situation in combination with consumption and inflation will need to

be closely watched in the coming months. The 2018 growth forecast remains unchanged at 1.1%.

2.1

-3

-2

-1

0

1

2

3

4

Jun 16

Jul 16

Aug 16

Sep 16

Oct 16

Nov 16

Dec 16

Jan 17

Feb 17

Mar 17

Apr 17

May 17

Jun 17

Sources: Ministry of Economy, Trade and Industry and

Haver Analytics.

% change y-o-y

52.0

52.1

47

48

49

50

51

52

53

54

Jul 16

Aug 16

Sep 16

Oct 16

Nov 16

Dec 16

Jan 17

Feb 17

Mar 17

Apr 17

May 17

Jun 17

Jul 17

Index

Sources: IHS Markit, Nikkei and Haver Analytics.

Services PMI

Manufacturing PMI