Japan – July consumer confidence

One of the most troubling correlations for the BOJ is the negative one between consumer confidence and inflation expectations. To be specific, whenever inflation expectations rise, consumer confidence falls.

At any time, that would be a big challenge for a central bank trying to generate a reflationary expansion of the economy. It is particularly challenging right now, given inflation expectations in July rose to a new multi-decade high. The flip side is consumer confidence falling to 30.2, a level which has only been lower during the financial crisis in 2008 and the covid waves of 2020 and 2021. Purchasing intentions in today's survey actually fell to the lowest on record. Worse still, given lags in the relationship, the rise in inflation expectations suggests that consumer confidence could drop further yet.

All this pessimism might not get fully reflected in consumption, with demand that has been pent-up by the covid problems of the last couple of years still not fully released. However, even this driver is facing potential headwinds, with covid numbers in the country once again rising quickly. That bears monitoring, although so far, mobility levels don't seem to have fallen much.