Japan Households' Sceptical Vision

Bank of Japan's 1Q Tankan confirmed what we already knew from looking at the way the private sector is managing its balance sheet - that corporate Japan is watching the sky, holding fire on investment spending until they become absolutely convinced that nominal sales growth can be relied upon to sustain asset turns.  But what of the household sector?  Has PM Abe done a better job of shifting their expectations than he has done with corporates?

The short answer is: not much. A glacial improvement in perceptions of the economy since 2009 was first boosted by the promise of Abenomics but then knocked back by last year's tax rises - and now once again the glacial improvement has resumed. Much of that has to do with improved household incomes. However, to the (small) extent that this has been accompanied by increased spending, households seem increasingly to be developing buyers' remorse.  Finally, whilst Bank of Japan has persuaded people that prices are currently going up, there has been no flicker at all in longer-term inflationary expectations.

Since 2006 the central bank conducts a quarterly survey of households, tracking opinions on economic conditions, household income and spending, and views on inflation. As one would expect, it paints Japan's householders as grim and generally pessimistic survivors of decades of deflation. Nevertheless, virtually every indicator shows an underlying long-term upward trajectory interrupted by last year's tax rises, but in partial remission by 1Q15.

The evidence is presented in diffusion indexes - ie, the proportion of people saying positive things minus the proportion of people saying negative things.  For example, in the chart below, in which the red line tracks views on the current situation relative to the previous 12 months, seven percent think things have got better, whilst 31.6% say things have got worse, so the DI reading is minus 24.6. The chart shows, PM Abe's election was greeted with a sharp and unprecedented outbreak of optimism about prospects, and a positive reassessment of current conditions. The optimistic expectations were sustained for two months before draining away, whilst the improvement in current conditions was maintained until . . . the tax rises.  However, 1Q has seen a partial recovery in household opinion on current conditions and the coming  year.

Over the long term, households'  economic views are determined mainly by changes in their income, with some input also from what's happening to businesses they are employed in/involved with, and also by the level of street bustle.  For 1Q, however, the improvement was driven by business performance, and to a lesser extent income. This is perhaps surprising, because the DI for what's happened to income over the last 12 months rose 3.5pts to minus 28.1, which is the best in the series' history.  In addition, income outlook rose 7.1pts to minus 27.8,  which was only enough to restore it to pre tax-rise levels.

But improved income prospects are probably not going to translate into increased spending. The DI for current household spending fell 4.9pts, and the outlook for spending also fell 0.6pts.  In the case of the outlook for spending, the DI has now retreated back to pre-Abe levels.  It's also worth paraphrasing what these two DIs are saying: 'Right now I'm spending more than I used to, but next year I'm quite determined to cut back'.  That's a fairly solid rebuff to those who anticipate that a change in inflationary expectations will release a rush of domestic demand.

There's a second with that view - it assumes that Bank of Japan's quantitative easing program not only can generate modestly positive inflation, but that by doing so it can raise household's inflation expectations.  The survey directly asks householders for their views on how fast prices are rising currently, how fast they will rise in the coming year, and how fast over the next five years. What it reveals is that Bank of Japan has managed to raise perceptions of current inflation from an average of 2.8% in 2012 to 5.6% now, and that this perception is still rising.   It has also managed to shift the dial slightly on 12m inflation expectations, with a rise from an average of 4% during 2011-2012, to a steady 4.8% now.  However, there has been absolutely no movement at all in 5yr inflationary expectations: in 1Q that expectation was at 4%, which is exactly the average sustained since 2010.