The Bank of Japan’s latest assessment that the economy is “expanding moderately” might have seemed surprising given the recent slump in exports. The adverse external backdrop was acknowledged, but Governor Haruhiko Kuroda revealed that there was “no change to our main scenario, in which income and spending remain in a virtuous cycle”.
The BoJ head is right to be optimistic. Real employee compensation is rising quickly, and the labour market remains very tight. The jobless rate could dip below 2.0% over the coming year, even with faster immigration.
Tech-related sectors are driving the expansion in job offers within services. This will more than compensate for any pullback in manufacturing. The first quarter could mark the low-point for key exports (semi-conductors, industrial robots).
Regardless, the service sector is strong enough to take up the slack and test the Phillips Curve in Japan. Core inflation may edge higher but will remain comfortably below target. There will be no need for further monetary stimulus, as Japanese equities are pulled higher by the rally in the S&P 500.
