Japanese monetary trends remain strong, suggesting upside risk to the consensus forecast of 1.2% GDP growth in 2015.

The six-month change in M1, M2 and M3 peaked in late 2013 and fell sharply through July 2014. The real-terms change turned negative from April, when a rise in the sales tax from 5% to 8% boosted consumer prices by 2.1%*. This contraction was reflected in falls in GDP in the second and third quarters – see first chart.



Money measures, however, have rebounded strongly since July, while the sales tax hike dropped out of the six-month inflation rate in October. Six-month real money growth, therefore, is back at levels consistent with solid economic expansion. Industrial output rose by 1.7% between the third and fourth quarters while next week’s GDP release may report an increase of about 1%, or 4% annualised.

Also notable is a continued firming of wage trends, consistent with evidence of a tight labour market. Total cash earnings at firms with 30 or more employees rose by an annual 2.5% in December, reflecting a 3.4% increase in winter bonuses. More significantly, growth in scheduled earnings (i.e. excluding bonuses and overtime) climbed to 1.2%, a level matched or exceeded in only three months since 1997. With headline consumer price inflation on course to fall to zero in the spring as a result of oil and tax effects, annual real wage growth should soon be running at 1-2% – second chart.



*Bank of Japan estimate.