Japanese Economy Recovering - GDP and Inflation Up

Japan’s Q2 GDP was revised sharply upwards to 0.9% (3.8% at an annualised rate) from an initial estimate of 0.6%. Increased estimates of companies' capital spending and public investment drove the upward revision. GDP for Q1 was also raised to an annualised rate of 4.1%, from 3.8%. The pick-up in business investment was particularly welcome as evidence that the economy was gaining fundamental strength.

The Bank of Japan said that Japan's economy was "recovering moderately", boosted by a pick-up in exports and in companies' investment in fixed assets. Public investment is also rising while the housing sector is looking stronger.

A gentle housing recovery in Japan may be underway as potential buyers respond to low borrowing costs and a sense that prices have bottomed after years of declines. Ten year fixed rate bank mortgage rates have fallen to 1.5%. Housing starts have been on an upward trend for some time and new construction in the 2013 fiscal year could top the one million mark for the first time in five years.
Prime Minister Shinzo Abe is to decide by early October whether to allow the sales tax to rise from 5% to 8% next April. He has tied his decision to the economy’s growth rate and the Tankan survey of business investment, among other data. If the sales tax increase is to go ahead as planned then there may be a supplementary fiscal stimulus package and/or further monetary easing by the BOJ to offset any perceived slowdown in consumer spending. The governor of the BOJ does not think the fiscal squeeze will "break" the Japanese economy.

Inflation in Japan rose to 0.7% in July, its highest level in almost five years, as the effects of a weaker yen pushed up the cost of fuel and electricity. Excluding the cost of energy, consumer prices fell 0.1% over the year. Nonetheless, some observers detect a demand driven pick- up in prices and a possible pick-up in wages; both of which are necessary if deflationary pressures are easing and the BOJ is to attain its target of a sustainable 2% inflation rate. Workers’ bonus payments have risen but base salaries are generally flat.

Japan's Real Cost of Borrowing turns Negative on "Abenomics" for 1st time since Summer 2008

Japan's real cost of long term borrowing has dropped below zero, bringing an end to years of high real rates and marking a milestone for "Abenomics".
Negative real interest rates are a key feature of Shinzo Abe's war on deflation, which aims to encourage bond heavy investors to seek higher returns through stocks, loans or property, or buying assets overseas.
Such portfolio rebalancing is expected to feed into higher prices, as banks begin to chase growth at home and as institutions such as life assurance companies swap JGBs for foreign bonds, undermining the Yen. Inflation also erodes gross government debt, which now stands at 240% of GDP.
Data on Friday showed that Japan's core consumer price inflation index rose from 0.7% in July to 0/8% in August pushed up mostly by higher costs for imported fuel. Meanwhile the benchmark 10 year government bond yield sank from just over 0.8% to 0.72%.
That means that investors long bonds during August were losing money in inflation adjusted terms. That is the first time that this has happened in Japan since summer 2008, when fuel prices pushed core CPI as high as 2% while 10 year bonds were yielding about 1.5%.

As portfolio rebalancing plays out, the Bank of Japan has promised to take up the slack, ramping up bond purchases to keep nominal interest rates as low as possible.
Since April, when new governor Haruhito Kuroda announced a shift to a new phase of "quantitive and qualitative monetary easing", the BOJ has been mopping up about JPY7.5tn of bonds a month, equivalent to about 3/4 of coupon bearing debt issued.

Source - FT 1 October 2013