Japanese data supports easing monetary policy from BoJ - ING

(Alliance News) - Japanese industrial production declined in November, according to data released by the Ministry of Economy, Trade & Industry on Wednesday.

Industrial production decreased by 0.1% in November from October. This was the third consecutive month of decrease in industrial output.

Production had decreased by 3.2% in October from September. On an annual basis, industrial production in November decreased by 1.3%.

Joo Kang at ING said the data signals that the Japanese economy remains very fragile, with "sluggish manufacturing activities" set to drag the current quarter's gross domestic product.

"Even worse news is that manufacturing output is likely to deteriorate in the first quarter of next year, given that IP is unlikely to rebound for the next few months," the ING economist added.

Kang argued that China's reopening will eventually boost Japan's industrial production, but said that the positive effects of this will "only be realised by the second quarter of 2023 or the second half of 2023."

Adding to Japan's "fragile" economy, Kang noted that the Japanese labour market continues to tighten, though not strong enough to lead to the wage growth sought by the Bank of Japan.

According to figures released by the Statistics Bureau of Japan on Tuesday, the unemployment rate in Japan declined to 2.5% in November from 2.6% in October.

The seasonally adjusted jobless rate for people aged 15 and over returned to 2.5% last month, the same as in August, after having risen to 2.6% for September and October.

In November of last year, Japan's unemployment rate was 2.8%.

"The jobless rate has fallen, but it was mainly because the number of workers that dropped out from the labour market was higher than that of employment," the ING analyst explained.

Kang said the cumulation of the latest Japanese data supports the Bank of Japan's view that easing monetary policy should continue.

Last Tuesday, in a surprise move, the Bank of Japan tweaked its longstanding monetary easing programme.

After a two-day policy meeting, the bank said it would widen the band in which it would allow rates for 10-year Japan government bonds to move, saying it would "improve market functioning".

"The Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points," it said in a statement.

The change marks a rare shift of gears for the dovish central bank, which has largely left its policy intact even as counterparts in other major economies hike rates to tackle inflation.

At the time of the announcement, ING's Francesco Pesole suggested that the move may be the first step towards a broader policy normalisation process in Japan.

For Kang, the central bank's meeting minutes revealed that the Bank of Japan is "trying to give the market a strong signal that their easing policy has not come to an end yet."

"Market expectations are growing for policy change by the Bank of Japan. We also agree with that to some extent. But... we still believe that the Bank of Japan won't be in a hurry to end its negative interest rate policy," she said.

Kang instead point to the spring salary negotiation next year as the "most important" to watch for further meaningful policy change from the Japanese central bank.

The spring salary negotiation - known as Shunto in Japanese - are wage negotiations between enterprise unions and employers in Japan. They begin in February or March each spring.

Tetsushi Kajimoto at Reuters explained that the precendent set at the Shunto wage talks influences wages at smaller firms, which, in turn, has "substantial" implications for the Japanese economy.

Looking ahead, Kang concluded that another tweak in yield curve control is "possible" in the first half of 2023, but a rate hike is expected in late 2023 or early 2024.

By Heather Rydings, Alliance News senior economics reporter

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