Nathan Gibbs, Japanese Equities Fund Manager at Schroders, comments on the impact of recent Japanese retail sales and inflation data for the country's economy…
Data released over the past two days in Japan showed April retail sales dropped 13.7% from the previous month while inflation over the same period rose 3.2% from a year earlier. Although a slightly worse decline than consensus expectations, we do not believe these numbers have come as any great surprise.
Following the 1 April consumption tax hike, that saw a 3% increase from 5% to 8%, sluggish April numbers were to be expected – particularly after the March surge that saw retail sales jump at their fastest pace since 1997 as Japanese consumers rushed to beat the deadline. Likewise, the 3.2% inflation rate in April, a 23-year high, following the sales tax increase and stimulus from the Bank of Japan (BoJ) was in line with market expectations.
Meanwhile, for a clearer view of the medium-term impact, data over the next few months will better determine how the Japanese economy is holding up (we expect retail sales to recover in the second half of the year). On a host of other data points, the numbers have been encouraging. Machinery orders, normally a leading indicator of capex, in March rose at its fastest pace since 1996 and this trend looks set to continue as companies ramp up spending. Attention is now focused on wage growth, to ensure real incomes aren’t falling, and although there are indications that this is beginning, the effect is smaller and slower than might have been hoped so far. However, the Bank of Japan seems generally confident about the economic situation and may not feel the need to ease policy further in the near future. Instead, investors are looking to Prime Minister Abe to take action on his ‘third arrow’ of structural reforms to boost long-term growth.
On the whole, the recent corporate earnings season finished ahead of expectations as guidance for the financial year ahead has been mostly positive."