All of these issues are having an impact on economic activity and Chinese authorities are downplaying their goal of 5.5% real GDP growth for 2022, which now looks unattainable. Indeed, just this morning, the National Bureau of Statistics released weaker-than-expected data on retail sales, fixed investment and industrial production. Just before the release of these data, the PBOC announced a 0.10% reduction in its one-year medium term lending facilities and seven-day reverse repo rate, and monetary easing, rather than monetary tightening looks more likely in the year ahead.
Japan: A Welcome Rise In Inflation
Japanese inflation remained moderate in June with overall CPI rising by 2.4% year-over-year and core inflation, excluding food and energy climbing just 0.2% relative to a year ago. July CPI inflation, due out Friday, is expected to fall to 2.2% year-over-year with a slight uptick in core inflation to 0.4% year-over-year.
Although inflation is now above pre-pandemic levels in Japan, it remains low in absolute terms. This is despite a collapse in the exchange rate, which has seen the yen fall from 105 to the dollar in early 2021 to 133 today, the same supply disruptions that have boosted inflation elsewhere in the world and significant fiscal stimulus.
However, deflationary psychology is deeply imbedded in Japan as the Bank of Japan has failed for many years to achieve its sustained 2% inflation target. Even with inflation running above that target over the summer, at its July meeting the Bank of Japan predicted a relapse in inflation to 1.4% in fiscal 2023 (which starts in April of next year).
This prediction of low Japanese inflation is probably on the mark. While the Japanese economy saw 2.2% real GDP growth in the second quarter, growth will likely slow in the third quarter as a wave of Omicron infections is appears to be generating weakness in both manufacturing output and services demand. Signs that the Federal Reserve may move in a more dovish direction appear to have halted the yen slide, while weakness in the Chinese economy should further stem demand.
Wage growth has picked up recently in Japan and this, along with a still very low unemployment rate of 2.6% should allow Japan to avoid a return to outright deflation. However, in a world where many countries see high inflation as a problem, Japan would welcome a period where inflation was steadily positive.
Investment Implications
For investors, while global inflation has been the key theme of the first half of 2022, inflation should generally fall over the rest of the year and into 2023. Some key central banks, however, including the Federal Reserve, the European Central Bank and the Bank of England, sound very determined to help cut inflation faster. They may succeed, but only at the cost of generating further economic weakness or recession.
Having said this, even if central banks overdo it, the global economy should return to an environment of slow and steady growth in 2023 and beyond, with much lower inflation than has been seen this year and, eventually, lower interest rates. Both long-term bonds and global stocks should benefit from this trend, although market volatility, as the inflation battle rages, will likely continue to favor those financial assets that currently look most attractive from a valuation perspective.
David Kelly is chief global strategist at JPMorgan Funds.