Key data on industrial output, retail sales and the labour market will be watched out of Japan in the next few days, with investors hoping they will shed some light on the state of the Japanese economy at the start of the third quarter. The release schedule will begin with retail sales on Thursday (Wednesday, 23:50 GMT), and will be followed by the unemployment rate, the jobs/applicants ratio and industrial output on Friday (Thursday, 23:50 GMT). Typically, Japanese data do not trigger major moves in forex markets, but with some recent signs of strengthening wage growth and consumer spending, any further evidence pointing to such trends could fuel speculation of an early exit by the Bank of Japan from its massive stimulus program.
Retail sales growth accelerated to a revised 1.7% year-on-year in June as consumers spent more on food and fuel. Sales are forecast to have eased a little in July, rising by 1.2% y/y, though this would still represent the ninth consecutive month of positive growth. Japanese households have been turning more confident in recent months as a tight labour market has been gradually pushing up earnings. Household spending surged by 2.9% month-on-month in June, ending four straight months of declines. This follows a spike in both nominal and real wage growth in June, when total cash earnings rose by an annual rate of 3.3% – the highest since 1997, while real earnings growth quickened to 2.5%.
Rising labour shortages are the main reason for the long-awaited build up in wage pressures as the country’s jobless rate hovers near 25-year lows. The unemployment rate is forecast to have remained at 2.4% in July. The jobs/applicants ratio, which shows how many job openings are available per applicant, is expected to remain unchanged, at 1.62. With the labour market expected to tighten further in the coming months and a planned hike in the minimum wage, Japanese workers look set for further increases in their incomes, which bodes well for future household spending.
An improving domestic demand picture, led by higher wages and consumption, couldn’t have come at a better time as global trade tensions pose a serious downside risk to exports – Japan’s main growth engine. Exports have been rising at a moderate pace in 2018 compared to the double-digit growth enjoyed during much of 2017. This has started to reflect in industrial production, which slumped by 1.8% m/m in June. Output is expected to have recovered only marginally in July, increasing by just 0.2% m/m.
The yen is unlikely to react strongly to the data but any positive surprises in the figures that were to underpin the view of strengthening earnings and consumption could see the Japanese currency appreciate. Many analysts think the Bank of Japan could begin to curtail its ultra-loose monetary policy program before inflation has hit its 2% target if policymakers were confident that growth was on a sustainable path.
Dollar/yen could seek immediate support in the 110.75 region if the yen was to gain on the back of upbeat numbers this week. A drop below 110.75 would see the 110.30 area coming into focus before the pair was to test its 200-day moving average, currently around 109.80. Alternatively, a disappointing set of figures that point to renewed weakness in the Japanese economy could drive dollar/yen above the nearest key resistance at 111.50. Sharper gains would bring the 112-handle into view, with the next challenge coming from the August top of 112.14.
