Japanese retail sales jump ahead of sales tax hike but possible inflation spike risks bond market blow-up

A report today showed that Japanese retail sales rose 11.0 percent in March from the previous year, the fastest annual pace in 17 years.

However, the surge is the result of consumers going on a shopping spree before a national sales tax hike took effect on 1 April and is likely to be followed by a decline in consumer spending the following month.

Indeed, James Gruber at Asia Confidential thinks that “Japan’s economy isn’t recovering, despite what the Bank of Japan and mainstream economists tell you”, and that more stimulus is likely by July.

Still, despite a weak economy, Gruber thinks that a tight Japanese labour market is likely to result in higher wages over the next 2-3 years.

“Japan’s working age population has decreased from 69 million in June 1997 to 65 million now. Those aged 15-24 have plummeted from 8.9 million to 4.9 million over the same period,” he wrote. This has contributed to a falling unemployment rate.

According to Gruber, the tightening labour market, combined with the “enormous stimulus” from policy-makers, “should produce more inflation than the BoJ bargained for”.

And if inflation spikes, so too will interest rates. “If this scenario plays out, there’s a high likelihood that Japan’s bond market will blow up,” he wrote.