Let me say it again – it’s domestic demand (in Japan), stupid

The Nikkei had a 20% set-back, but is now surely making a major comeback. This morning Nikkei is up 3.5%. The rally continues supported by very strong macroeconomic numbers and you have to be very suborn to continue to claim that monetary easing is not working in Japan (I wonder what Richard Koo will be saying…)

I think the most notable thing about the Japanese economy right now is that it is domestic demand rather than exports, which is really the driver of growth. This is of course what I have argued all along (see my earlier comments here, here, here and here).

But let me instead quote my good colleague and Danske Bank’s Asia analyst Flemming Nielsen:

“Data released overnight shows that the Japanese economy continues to power ahead and now appears to be moving out of deflation. While Japan’s export so far is urprisingly resilient, it would be wrong to accuse Japan of just stealing growth from the rest of the world through a weaker yen. On the contrary the Japanese economy currently appears to be gaining much of its strength from strong domestic demand.

Despite all the focus on the negative impact from a weaker yen, Japan at the moment appears to be a stabilizing force for the global economy. The data released overnight indicates GDP growth above 3.5% q/q AR in Q2 on the back of 4.1% q/q growth in Q1.

…Japan’s industrial production continued to expand solidly in May, where industrial production seasonal adjusted increased 2.0% m/m. This was much stronger than expected and the fourth month in a row with an increase. The strength in manufacturing activity was also evident in the Markit/JMMA manufacturing PMI for June, where it improved to 52.3 from 51.5 in May …The export orders component did decrease slightly from 52.1 from 52.6 but overall was surprisingly resilient. Total new orders continued to improve to 54.7 in June from 53.7 in May underscoring the current importance of strong domestic demand for the recovery in Japan.

…Deflation continued to ease in May where CPI excl. fresh food (the inflation measure BoJ targets) increased 0.0% y/y after declining 0.4% y/y in April. Core CPI excl. food & energy declined 0.3% y/y after declining 0.6% y/y in April. Based on preliminary CPI date for June for the Tokyo area we estimate that nationwide CPI excl. fresh food will stay at 0.0% y/y in June but CPI should start to show a positive year-on-year increase during Q3.

I find it very hard to be pessimistic about the Japanese story – monetary policy is working exactly the way Market Monetarists have argued it would work. The Bank of Japan is ending 15 years of deflation and in the process the Japanese economy is taking off. Imagine that the ECB would dare do something similar?

PS Yes, Kuroda still needs to work on communication and yes Japan badly needs structural reforms, but that is not changing that monetary policy is working.

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