Daily Economic Commentary: Japan

[PipDiddy]

The JPY's knees gave way as its counterparts put up a strong fight yesterday. Japan's economic calendar was empty then, allowing high-yielding currencies to take advantage of JPY weakness.

Today, Japan will release its household confidence reading for November. The gauge of household confidence, which is due 5:00 am GMT, could climb from 40.5 to 40.6 and indicate that confidence improved marginally.

Later on, the release of US retail sales could have a huge impact on risk sentiment. Retail sales for November are projected to rise by 0.6% while core retail sales could post a 0.5% increase. If the actual figures come in weaker than expected, risk aversion could plague the markets and pump up the safe-havens USD and JPY. Keep an eye out for that!

[PipDiddy]

The JPY slipped against all the other majors last Friday though its losses were not that pronounced compared to what it had during the previous day. Will it be able to turn its luck or will market confidence keep it from rising?

Japan’s household confidence unexpectedly fell to 39.5 in November from 40.5. It was originally seen to rise to 40.6. The latest result was the first time that the index dipped this year. It was said that the culprit behind that was Japan’s declining wages. Of course, spending is negatively affected with a shrinking pay check. The report, however, did not have any short term impact on the valuation of the JPY.

Earlier today, Japan’s Tankan manufacturing index for the fourth quarter came in better-than-expected at -24 from last period’s -33 score. Japan’s Tankan non-manufacturing index also improved to -22 from -24. Still, the both accounts remain negative which means that more of the firms that were surveyed remain pessimistic about their business. The yen’s rise over the other currencies, particularly over the dollar, due to risk appetite has been putting a cap on the industries move to recovery. In any case, positive advance in the figures gave some lift to the JPY.

On Friday, the BOJ will have its interest rate decision. Like before, the bank is still seen to keep its rate unchanged at 0.10%. The interesting question is… will the bank start with its exit strategies already? Japan is not fully out of the woods as exhibited in the Tankan survey. Given this, it is unlikely for the bank to remove some liquidity in its financial system as of the moment.

[PipDiddy]

The yen traded in a mixed manner other currencies yesterday. It gained initially when the Japan’s tankan manufacturing index came in better than expected but some of the yen longs eventually unwound as the European and US session rolled along.

AsI mentioned in my update yesterday, Japan’s Tankan manufacturing index printed -24 for the fourth quarter of 2009, slightly better than the -26 expected. It was also a huge leap from the -33 reading seen during the third quarter. The Tankan manufacturing index asks manufacturers whether they think the industry is improving or not through the use of a positive/negative scale. A positive reading means conditions are improving while a negative reading means otherwise.

The economic data to watch out for today is the tertiary industry activity report for the month of October (11:50 pm GMT). The report basically computes the monthly change in value of services bought by businesses. The forecast is a 0.5% increase, opposite the 0.5% decline seen in September. If the actual figure that prints is higher than 0.5%, we could see currency traders buy up the yen.

[PipDiddy]

The yen got pummelled yesterday, as it seems that traders are shifting their demand toward the dollar. This has helped the yen fall not only against the USD, but against the EUR and GBP as well.

Late yesterday, the tertiary industry activity report was released. The report – which measures how much companies spend on service related business – came in line with expectations as it printed an uptick of 0.5%. Still, like I said, it seems that traders have been focusing on the USD as of late, leaving the report to barely move the markets.

With no data coming out today, yen trading will probably be heavily influenced by FOMC statement that is coming out tonight at 7:15 am GMT. Traders may position themselves before the release of the report. If traders remain bullish on the USD, we may see the yen experience more losses throughout the day.

[PipDiddy]

The JPY showed signs of weakness yesterday as Japan's debt concerns started to resurface. With no economic reports to draw strength from, the JPY bowed down to the USD, its safe-haven rival.

Japan's exceedingly high debt ratio once again haunted the Asian giant as Moody's issued a statement saying that Japan needs to come up with a plan to reduce its debt. Debt rating concerns have been sprouting up here and there lately and I don't think the JPY would be too pleased if Japan joins the likes of Greece, Spain, and Ireland in suffering from credit woes.

Japan's economic calendar is empty today as traders focus their attention to tomorrow's BOJ rate statement. Although the rate decision is slated to be a non-event as usual, many are watching out for what the central bank officials have to say about Japan's ballooning debt.

[PipDiddy]

The JPY, in tandem with the USD, made a broad based rally against the other majors in yesterday’s trading. Both currencies benefited from a strong selling in the US capitals markets.

No economic reports were due yesterday in Japan.

Today, the Bank of Japan will have its interest rate decision. However, the time of the decision’s announcement is still tentative. Nonetheless, the bank is widely expected to leave its rate unchanged at 0.10%. Some economists, though, believe that the bank could further expand their easing actions as the recovery in Japan’s economy starts to dissipate. A rising yen and deflation continue to be Japan’s major concerns. The yen recently rose to a 14-year high against the greenback, putting a strain on the country’s exports. So if the BOJ expand its easing measures by say expanding their loan programs, the yen could be negatively affected.

[PipDiddy]

Recent US dollar rallies left the Yen virtually powerless at the end of the previous week. Strong US fundamentals, which hinted at a sooner rate hike, drowned out the appeal for the Yen, which was then suffering from a weak Japanese economic outlook.

As the threat of deflation continues to loom over the Japanese economy, the BOJ struck a relatively downcast tune as it mentioned that their economic growth might not be self-sustaining and sufficient. Although the pace of growth is picking up, the central bank expects it to slow down mid-2010. Boo. Looks like no rate hike is in sight yet...

Today, the BOJ will release its monthly report, which could reinforce the sour note of the BOJ rate statement. Stay tuned during the actual release at 5:00 am GMT. Then, on Tuesday, BOJ Governor Shirakawa is scheduled to deliver a speech at 7:00 am GMT, possibly shedding more light on the recent BOJ rate decision. Also due this week are the minutes from the latest monetary policy meeting.

On Thursday, Japan will report its household spending data, Tokyo core CPI, and unemployment rate. Household spending is expected to climb 0.5% year-over-year this November, much weaker than October's 1.6% annual increase. Tokyo core CPI is estimated to print a 1.8% decline while the unemployment rate could climb from 5.1% to 5.2%.

[PipDiddy]

For the fifth day in a row, the yen fell against the USD, leaving the USDJPY to close trading at 91.18. Could this be the theme for the rest of 2009?

In its BOJ monthly report released yesterday, the Bank of Japan kept its economic outlook unchanged, indicating that they are probably taking a wait-and-see approach, in order to gauge how effective recent policy measures have been. Once again, they expressed “cautious optimism”, saying that while conditions were improving, there weren't enough signs pointing towards a sustainable recovery.

The report also revealed that BOJ Governor Masaaki Shirakawa and his fellow central bankers were prepared to keep interest rates at near zero levels in order to combat deflation. Take note, one way to fight deflation is to keep interest rates at low levels. Given all the deflationary pressures the country is facing, I guess we won't be seeing a rate hike any time soon...

Later today at 7:00 am GMT, Shirakawa will be speaking once again, this time in front of the Securities Analyst Association of Japan. Remember, it is important to take note of whenever high ranking officials (like the head of the central bank) are speaking, because they could drop hints of possible monetary policy moves.

[PipDiddy]

Yen weakness was seen all over the charts as the greenback continued to reign supreme. Yen crosses were able to hold on to their recent gains, with the EURJPY even climbing higher.

Economic data from Japan has been particularly disappointing. Monthly supermarket sales printed a negative figure for the twelfth month in a row, highlighting the slump in consumer spending. Meanwhile, the small business confidence index chalked up its third month in consecutive declines. In addition to that, a Reuters poll showed that consumer sentiment also worsened in November.

Japan will release its BSI manufacturing index and the minutes from the latest BOJ monetary policy meeting today. The BSI manufacturing index, which is due 11:50 pm GMT, could show that optimism is fading for the manufacturing industry. The reading for the fourth quarter could drop from 15.5 to 11.2, based on the consensus. Another blow to the Yen? Ouch!

[PipDiddy]

The yen was not able to keep up with the dollar in last week’s pre-Christmas trading. Instead, it closed mixed against the other currency big boys.

Japan’s BSI manufacturing index came in better-than-expected at 13.2, above the 11.2 consensus. Still, fourth quarter BSI score is below last period’s 15.5 mark, indicating that optimism in the sector is dwindling. Based on the survey, companies see a 23.5% drop in capital spending and a 32.8% slide in capex for the fiscal year 2009.

On a separate note, the BOJ MPC meeting minutes detailed the bank’s ¥10 trillion fixed-rate lending facility in an effort to encourage more borrowing and counter the yen’s strong rally against the dollar. The bank’s emergency meeting held on December 1 was prompted by when the yen reached its 14-year high against the greenback at 84.83 and the continuous drop in the country’s inflation.

Earlier today, Japan’s m/m preliminary industrial production, y/y retail sales and average cash earnings in November were released. Industrial production for the month surpassed the 2.5% consensus with a 2.6% gain. Retail sales and cash earnings, on the other hand, continued to flop with a 1.0% and 2.8* declines, respectively.

No other top tier economic reports are due in Japan for the rest of the week, and of the year 2009 for that matter. The yen could just be range-bound until the new year starts.