JPMorgan Securities Japan Co., Ltd.

Economic Research
Masamichi Adachi e e e e Global Data Watch
e February 1, 2019

Japan Figure 2: PMI manufacturing

DI, sa
 Industrial production edged down in December, but is 58
likely to increase this quarter on top of a bounce in 4Q New orders Output
56
 But, the sharp PMI fall in January and soft sentiment 54
indicators challenge the positive outlook 52
50
 Consumption looked firm at the end of last year, while 48
consumer sentiment continued to soften New export orders
46
 Latest BoJ’s estimate of output gap is 1.25% while the 44
Cabinet Office’s is -0.2% 2016 2017 2018 2019
Source: Markit

While both business and consumer sentiment continued to

worsen on downbeat global economic and political news, in-
coming hard data suggest the economy’s momentum remains
positive, at least so far. Indeed, manufacturers’ production
edged down in December, but their output projections are for
a strong gain in February after a small decline in January
(Figure 1). Retail sales rose more than expected in December,
suggesting that consumption was firm at the end of last year.
This strength, in our view, largely reflects favorable labor
market conditions. The unemployment rate edged down to
2.4% in December, close to the expansion low of 2.2% rec-
orded in May last year, and payroll employment growth re-
mains a firm 1.7%oya, albeit somewhat slower than in 1H18.
While wages per worker remains subdued, the increase in
employment should support household income.
Figure 1: Industrial production and manufacturers' output projection
%3m/3m, saar
25 Output projection through Feb19
20
15
10
5 in 1Q (Figure 3).
0
-5 IP through Dec18
-10
2015 2016 2017 2018
Source: METI, J.P. Morgan
IP report suggests continued uptrend
Industrial production edged down 0.1%m/m, sa in December
after a 1.0% fall in November. Nevertheless, the 2.9% jump in
October left IP up 8.3%q/q, saar in 4Q following a 5.5% con-
traction in 3Q. These readings were close to expectations; the
December print was a bit weaker than our estimate (+0.1%)
but firmer than the consensus forecast (-0.5%). We are now
comfortable with our 4Q GDP growth forecast at 2.5%q/q,
saar, after a 1.3% contraction in 3Q. More encouragingly
manufacturers project a 0.1% output decline in January (re-
vised up from -0.8% reported last month) and a 2.6% rise in
February. To be sure, the projection survey tends to be too
optimistic and the METI forecasts a large 2.3% fall in January
based on the survey outcome (which looks too weak to us
based on the recent performance of the estimate). The final
PMI print was revised up a bit from the flash reading but the
basic picture was unchanged, suggesting that the manufactur-
ing sector stumbled at the beginning of the year. However, the
solid output gain projected for February reassures us that the
positive momentum has not been lost. We maintain our fore-
cast for a modest 0.5% ar IP gain and 1.2% real GDP growth
Figure 3: Real GDP and IP
%q/q, saar, both axes, shading shows J.P. Morgan forecast
2019 4 10
2 5

To be sure, the manufacturing PMI declined markedly in Jan-

0 0
uary (Figure 2), and manufacturers’ output projections tend to
be too optimistic (Figure 1). We are thus cautious on the near- -2 GDP IP -5
term outlook for manufacturing as well as the overall econo-
my. Still, the strong output gain projected for February eases -4 -10
our concern that the economy stumbled suddenly as the PMI 2016 2017 2018 2019
Source: Cabinet Office, METI, J.P. Morgan
suggested. Next week, the December consumption activity
index and the January Economy Watchers survey will offer us
more color on consumption and small-firm sentiment.

This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being 1
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
JPMorgan Securities Japan Co., Ltd. Economic Research
Masamichi Adachi eee
eeeeeeee
eeeee Japan
e February 1, 2019

Consumption looks fine, but sentiment after the 3Q contraction, in line with our economic growth
continued to soften forecast. Although the increase in personal services (accom-
modation, dining out, and amusement) and medical & health
Retail sales rose 0.9%m/m, sa in December, beating our care services eased in December at 5.2% and 2.0%, respec-
(0.3%) and the consensus (0.4%) forecasts. While sales fell tively, both categories have been on firm increasing trends in
1.1% in November, the solid gains in October (1.3%) and spite of monthly volatility, reflecting the strong growth in
December left sales up 4.6% annualized in 4Q, similar to structural demand.
3Q’s 4.4% gain. The December increase was broad-based
except fuel, which likely reflected a decline in gasoline prices.
Figure 5: Payroll employment
While retail sales are not necessarily good at tracking con-
%oya
sumption including services, the gain in retail sales supports Total
our view that consumption was firm in 4Q, driven by solid 3
gains in labor income and benign weather (Figure 4). While 2
we need to await the BoJ’s consumption activity index (CAI,
due on February 7) and the Cabinet Office’s index (COI, due 1
the week of February 11) for more information, the risk to our 0
forecast of 2.5% 4Q growth in GDP-based consumption
-1 Manufacturing (3mma)
skews to the upside.
-2
Figure 4: Real retail sales and GDP-based real goods consumption 2013 2014 2015 2016 2017 2018 2019 2020
%q/q, saar Source: Statistics Bureau, J.P. Morgan
Retail sales deflated by
8 CPI goods
6 GDP-based Two estimates of the output gap
4
2 The BoJ released its latest output gap estimate, showing that
0 the economy was running 1.25% above full capacity (poten-
-2 tial GDP) in 3Q18. However the Cabinet Office estimate re-
-4 leased last December was a negative 0.2% gap (Figure 6). The
-6 difference reflects divergent estimation methods; the Cabinet
-8 Office methodology is standard—difference between actual
2015 2016 2017 2018 2019 GDP and estimated potential GDP—while the BoJ’s is unique,
Source: METI, Statistics Bureau, Cabinet Office, J.P. Morgan
based on directly estimating the labor and capital utilization
rates (i.e., not relying on actual GDP). The difference in cal-
However, consumer sentiment has softened further; in Janu- culation methods results in different estimates of potential
ary the consumer sentiment index dropped to 41.9 from 42.7 growth as well; the BoJ’s estimate is 0.76%, well below the
in December, reaching its lowest level since November 2016. Cabinet Office’s 1.0%. While Japan’s disappointing inflation
We had expected no change in this index as food and energy performance looks more consistent with the Cabinet Office
prices have fallen, but the decline in equity prices and gloomy estimate, firms’ perception of severe shortages of labor and
media reports on economic outlook in both Japan and globally productive capacity support the BoJ’s estimate.
probably weighed on sentiment. To be sure, sentiment is not
necessarily a good leading or coincident indicator of con- Figure 6: Output gap
sumption; indeed, December and 4Q retail sales were solid % of potential GDP, shading shows recessions
despite the ongoing decline in sentiment. Still, we think that 4 BoJ estimate
consumption growth will slow in this quarter.
2
0
Labor market remains tight
-2 Cabinet Office
The unemployment rate edged down to 2.4% in December,
-4 estimate
close to the 2.2% expansion low recorded in May last year.
Payroll employment rose 1.7%oya in December after a 2.0% -6
gain in November. It moderated from rapid growth recorded -8
in 1H18, but the trend continued to increase gradually (Figure 00 03 06 09 12 15 18
Source: Cabinet Office, BoJ
5). Payroll employment in manufacturing and transportation
rose firmly, 1.9% and 4.6%, respectively, in December after
the 3Q decline, suggesting business activity recovered in 4Q

2 This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
JPMorgan Securities Japan Co., Ltd. Economic Research
Yuka Mera eee
eeeeeeeeeeeee Global Data Watch
February 1, 2019

Data releases and forecasts Fri Economy Watchers survey

Feb 8 DI
Week of February 4 – 8
2:00pm Oct Nov Dec Jan
Current conditions (sa) 49.5 51.0 48.0 49.0
Tue Markit services/composite PMIs Households (sa) 48.9 50.6 47.6
Feb 5 Diffusion index, sa
Business (sa) 49.7 50.0 47.3
9:30am Oct Nov Dec Jan
Employment (sa) 53.2 55.3 51.8
Services (business activity) 52.4 52.3 51.0 51.2
Composite 52.5 52.4 52.0 We look for the current conditions DI in the Economy
We expect the Markit services PMI rose 0.2pt to 51.2 in Watchers survey to rise 1pt to 49.0 in January. The DI
plunged 3pts in December due to the financial market vola-
January. The index plunged 1.3pts in December, but we
tility and weaker-than-expected year-end sales. Stock pric-
think it was weaker than its underlying trend. We thus we
es recovered recently from December’s sharp decline, thus
expect it to increase as positive partial payback in January.
we expect small firms’ sentiment to improve somewhat in
January.
Fri Employers’ survey – preliminary
Feb 8 %oya
Source: BoJ, CAO, EJCS, JADA, JCSA, JDSA, JFA, JLMVMA, Markit, METI, MHLW, MILT, MoF,
9:00am Sep Oct Nov Dec
Reuters, Statistics Bureau, J.P. Morgan forecast
Monthly wages per employee 0.7 1.1 1.7 1.2
Contract wages 0.4 1.1 1.3
Scheduled payments 0.5 1.1 1.3 Review of past week’s data
Overtime payments -0.5 0.9 0.6 Services producer prices (Jan 28)
Special payments 9.0 0.6 8.7 Base year 2010
Real wages (total) -0.6 -0.6 0.8 Oct Nov Dec
Total hours worked -3.3 -0.3 1.3 %oya 1.3 1.2 ___ 1.2
Regular employment 0.8 0.7 0.7 Service producer price index (SPPI) inflation rose 1.1%oya in
Full-time workers 0.1 -0.1 0.0 December, easing from the recent 1.3% peak in October. But
Part-time workers 2.3 2.4 2.2 December’s moderation was due mainly to the volatile advertis-
We project that total earnings per employee rose 1.2%oya ing category, which decelerated sharply from 2.7% in Novem-
in December. It marked a solid 1.7% gain in November, ber to 0.1%. On a quarterly basis, the SPPI rose 1.2%oya in
since scheduled payments, which show the underlying 4Q18, holding steady from 3Q, and recorded the highest figure
trend of wages, rose firmly at 1.3%, adding to the strong since 1992 (excluding the impact of the VAT hike). The result
8.7% increase in special payments. We expect special suggests that the SPPI’s underlying trend has increased steadily
payments to decline in December as a negative partial pay- since companies’ price revisions at the beginning of the fiscal
back but scheduled earnings to continue rising firmly. year. Although transportation (including international transpor-
tation) eased in response to the decline in oil prices, domestic
transportation (calculated by J.P. Morgan) and temporary em-
Fri Balance of payments ployment agency services have been on a steady rising trend, re-
Feb 8 flecting the rise in labor costs. These details are in line with our
8:50am Sep Oct Nov Dec basic view that the upward trend in services prices likely will
Current account (¥bn sa) 1363 1211 1439 1568 strengthen with above-potential GDP growth and a tighter labor
Trade balance -164 -194 -176 ____ market.
Exports 6630 7005 6827 ____
Imports 6794 7199 7003 ____ Commercial sales (Jan 30)
Services -38 -43 -64 ____ %m/m, sa
Primary income 1706 1643 1804 ____ Oct Nov Dec
Secondary income -142 -195 -125 ____ Total retail sales 1.3 -1.1 0.3 0.9
%oya 3.6 1.4 0.6 1.3
Current account (¥bn nsa) 1849 1310 757 720
See main essay.
We expect the current account surplus expanded in De-
cember. Based on customs trade data, the nominal trade
balance turned to a surplus in December for the first time
in three months, since nominal imports fell largely due to
the decline in import prices. In annual data, the trade bal-
ance surplus narrowed sharply in 2018 largely due to the
import oil price surge in the middle of the previous year.

This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being 3
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
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JPMorgan Securities Japan Co., Ltd. Economic Research
Yuka Mera eee
eeeeeeeeeeeee Japan
February 1, 2019

Consumer sentiment (Jan 30) Auto registrations (Feb 1)

DI, sa Nov Dec Jan
Nov Dec Jan JPM adjusted* (%oya) 13.6 -2.4 ___ 4.0
Consumer sentiment 42.9 42.7 42.7 41.9 (mil units, saar) 4.28 4.03 ___ 4.12
Standard of living 40.8 40.6 ___ 40.1 (%m/m, sa) -0.8 -5.9 ___ 2.3
Income growth 41.8 41.7 ___ 41.4 Total (%oya) 8.3 -4.4 ___ 2.3
Labor market conditions 46.6 45.8 ___ 44.3 (mil units, saar) 3.49 3.32 ___ 3.35
Durables purchases 42.4 42.8 ___ 41.7 (%m/m, sa) 0.0 -5.0 ___ 1.1
% of respondents, "Rise" minus "fall" * incl. mini vehicles
Inflation expectations in next 12 months The J.P. Morgan adjusted measure of new auto registrations,
nsa 80.8 79.2 ___ 80.1 which we think is a better indicator of auto consumer spending
sa 80.5 79.4 ___ 79.5 in real terms, rose 2.3%m/m, sa in January after a 5.9% decline
1. The DI asks whether a respondent thinks that now is a good time to purchase durables in December. The January rise was partial payback from the
See main essay. December plunge reflecting several recalls at major companies.
However, its increasing trend appears to be very gradual, and
the January level was 7.8% annualized lower than the 4Q aver-
Industrial production – preliminary (Jan 31) age, when it jumped 11.5% ar. Although auto registrations do
%m/m, sa not necessarily track GDP-based durable goods consumption,
Oct Nov Dec this result poses moderate downside risk to our forecast for
Production 2.9 -1.0 0.1 -0.1 GDP-based total private consumption of a 0.5%q/q, saar rise in
Shipments 3.5 -1.2 0.3 1Q19 after a 2.5% increase in 4Q18. We think auto registrations
Inventories -1.3 0.1 1.0 will pick up on a front-loaded demand increase ahead of the in-
Inventory/shipments ratio -0.5 -2.2 2.2 troduction of the consumption tax hike in October 2019, but its
See main essay. acceleration likely will be more moderate than in 2014 due to
government measures to ease the pain from the tax hike, such as
Housing starts (Jan 31) deductions for auto tax.

Oct Nov Dec Source: BoJ, CAO, EJCS, JADA, JCSA, JDSA, JFA, JLMVMA, Markit, METI, MHLW, MILT, MoF,
Housing units %oya 0.3 -0.6 4.0 2.1 Reuters, Statistics Bureau, J.P. Morgan forecast
%m/m, sa 0.7 0.6 0.6
Mn units saar 0.95 0.96 0.96
Floor space, 6mma* (%m/m, sa) -0.3 -0.2 1.3
December housing starts by unit rose 0.6%m/m, sa after a 0.6%
rise in November. Although the built-for-rent category fell 5.0%
and its trend has been weak, partly due to banks’ tightening of
their lending standards for rental apartments, the built-for-sale
and the owner-occupied categories rose firmly at 4.4% and
2.4%, respectively. The six-month moving average of starts by
floor space, which we think is a better indicator of real GDP
residential investment and is in put-in-place terms, rose
1.3%m/m, sa in December, leaving the 4Q average 2.5% annu-
alized higher than the 3Q average. It was almost in line with our
forecast for real GDP residential investment of a 2.0%q/q, saar
increase. We expect that housing activity, especially in the
built-for-sale and owner-occupied categories, will pick up in
2019, reflecting the demand increase ahead of the introduction
of the consumption tax hike in October 2019, but its accelera-
tion likely will be more moderate than that in 2014 due to the
government’s measures to ease the pain from the tax hike, such
as tax deductions for housing loans.

Labor force survey (Feb 1)

%m/m, sa
Oct Nov Dec
Unemployment rate (% sa) 2.4 2.5 2.4 2.4
Job offers ratio (% sa) 1.62 1.63 1.64 1.63
See main essay.

4 This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
JPMorgan Securities Japan Co., Ltd. Economic Research
Yuka Mera e e e e Global Data Watch
February 1, 2019

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February 1, 2019

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