Japan's consumption bounced back in May, but to improve in Q3

Japan's consumption-related data bounced back in May after falling in April. Based on household survey and retail sales data, consumption is now tracking slightly above Q1levels. 

However, it is still trailing for Q2 (0.3% q/q). The May composite index of consumption, which provides a more reliable gauge, is expected to be released sometime over the next week.

Meanwhile, the June BoJ Tankan results were generally stronger than expected and provided several reasons to believe the economic recovery remains intact going into Q3.

"Despite the rise in inventories seen in the IP data, the Tankan indicated that perceptions of inventory excess remained muted and that domestic and overseas supply and demand conditions,while still slack, were expected to improve into Q3", says Barclays.

A serious pullback in production triggered by inventory adjustment is unlikely. Notably, the diffusion index of business sentiment among large manufacturers improved in June and, although only slightly, in the outlook for September.