Japan: Resilient Consumer Despite Weak Labour Market

• The Japanese consumer appears to be resilient despite a continued deterioration in the labour market. Apparently there has been a major positive impact on private consumption from tax cuts currently being implemented as part of the stimulus package.
• Economic data for May suggest that Japan already returned to substantial positive growth in Q2 09. Economic data currently indicate 2%-3% q/q AR GDP growth in Q2.

Details

Another batch of economic data was released overnight. JMMA manufacturing PMI increased less than we expected. In light of industrial production growing at record pace in April and May and very strong export volumes we expected manufacturing PMI to have finally jumped above 50 in June. This did not happen, but both the current output component and new export orders jumped above 50 in June.

The details in the manufacturing PMI remain very strong. The finished goods inventory declined to its lowest level ever since the survey started in 2001 and the new order-inventory balance continues to improve, suggesting the current strong momentum in industrial activity will be maintained in coming months (see chart next page). Despite the modest increase in PMI in June in Japan, the overall picture in manufacturing PMIs is that the Japanese economy is currently rebounding faster than Euroland and the US.

Today's labour market report confirmed that the labour market continues to deteriorate. In line with expectation the unemployment rate in May increased to 5.2% from 5.0% (see chart on next page) and according to our calculations seasonally adjusted employment decreased 0.6% m/m.

The biggest surprise in today's numbers was the 0.3% y/y (Consensus: -1.5% y/y) increase in household spending. In line with other recent data it suggests that private consumption has stabilised and possible even recovered slightly despite the continued deterioration in the labour market. The main reason is probably the positive impact from tax cuts currently being implemented as part of Japan's fiscal stimulus. Hence, questions of sustainability remain as the weak labour market might ultimately gain the upper hand when the impact from tax cuts wanes.

Assessment and Outlook

Economic data for May suggest that Japan already returned to substantial positive growth in Q2 09. In our opinion economic data currently indicate 2%-3% q/q AR GDP growth in Q2 09 driven mostly by strong exports and stabilisation in private consumption. Inventories and corporate capital expenditures remain a drag on growth.

In our latest forecast for the Japanese economy we forecasted zero GDP growth in Q2 and a substantial recovery in the following quarters. It now appears that the recovery has been pulled forward somewhat and it is unlikely we will make major changes to our overall forecast. Our main macroeconomic message continues to be that Japan will outperform both the US and Euroland on GDP growth in the coming quarters, but this will mostly be a catch-up on strong underperformance in Q4 08 and Q1 09, please see Research - Japan: From underperformer to outperformer.

Danske Bank
http://www.danskebank.com/danskeresearch

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