It’s common knowledge that the chronic problem the BOJ has had to deal with is low inflation. But, inflation is unlikely to pick up if consumers are unwilling to spend.
So, keeping an eye on consumer sentiment can give us some advance warning about where inflation trends are going, and whether the BOJ will ever be able to look towards normalizing policy.
In general, and particularly recently, the yen has been driven primarily by safe haven flows. The move in the yen last Friday was the latest evidence. If, however, consumers are feeling a little better about spending, it could provide some more weight to fundamentals.
Japan imports a significant amount of its consumer goods. If consumers start buying, it could weaken the yen, even as traders look for a safe haven. Or it could accelerate the rise in the USDJPY if investors finally get over their covid jitters.
But how good are the numbers, really?
Last month, consumer confidence in Japan moved above pre-pandemic levels for the first time. This came on the heels of the removal of covid restrictions across the country.
Naturally, the expectation was for consumers to go back to spending this month. The thing is, though, consumer confidence had been falling for well over a year even before the pandemic.
Therefore, returning to pre-pandemic levels is evidently a good sign. Nonetheless, it doesn’t mean that the Japanese economy has returned to full health. Of course, the pandemic might have changed the dynamic of the economy. And now consumer confidence could continue to move higher.
The underlying issues haven’t changed
The thing that drove down consumer confidence before the pandemic is arguably the hike in sales taxes as part of Abenomics. The new PM has vowed to double down on the outlook, and raise taxes again after the pandemic.
So, even though there is some initial optimism among shoppers now, it might not continue for long. Additionally, it takes some time for increased consumer demand to translate into inflation.
What drives the yen, though, are bond yields, which are tied to inflation expectations. Even if consumer confidence improves, if investors aren’t convinced that inflation will tick up in the near future, bonds are likely to remain under pressure. In turn, this means that there will be a little carryover to the yen in the short term.
However, a blowout number could convince investors that at least in the short term it might be prudent to expect a weaker yen. If consumer sentiment disappoints, then it would likely confirm the status quo, with people waiting on risk appetite to drive the yen.
What to look out for
Analysts anticipate that Japan’s November Consumer Confidence will move up again to 40.0 from 39.2 prior. For comparison, the series was around 39.5 ahead of the pandemic.
And if the data meets expectations, it would be the best result since early 2019. However, it’s quite a bit lower than just under 45, which was the norm before the latest round of sales tax hikes.
Even when consumer confidence was 5 points higher than it was now, inflation was still a problem for the BOJ. So, for now, it’s unlikely that consumers will be putting enough pressure on the currency to move the needle much.