Daily Economic Commentary: Japan

Daily Economic Round up of data from Japan!

The yen was the biggest loser in yesterday’s trading session as it fell sharply versus both the dollar and the euro. Positive data that came out of Japan gave a nice background for risk appetite to slightly pop its head back into the market.

Household spending surprised when it showed that spending increased by 0.3% instead of the 1.5% decline initially expected. Employee earnings were slightly less bad when it printed a 2.9% decline in earnings. The forecast was at -3%. The manufacturing purchasing mangers’ index shared the same somewhat positive tone. It came out at 48.2, an improvement from last reporting period’s 46.6.

The Tankan manufacturing index is due today at 11:50 pm GMT. This could potentially cause some waves in the foreign exchange market because it deals with Japan’s main industry – the manufacturing industry. The survey attempts to assess whether the country’s manufacturing industry is improving or worsening by using a positive/negative scale. A reading above 0 means that conditions are improving. Economists are expecting the survey to print -43.

The Tankan index, which is one of the most-awaited major economic reports from Japan, wasn�t as strong as expected. The manufacturing index rose from -58 to -48 and failed to meet expectations at -43. Meanwhile, the non-manufacturing index climbed from -31 to -29, which is slightly lower than the consensus at -26. Consolidation was seen among JPY crosses in anticipation of this report. However, no large spikes took place after the release of the weaker-than-expected numbers.

Only the nation�s monetary base is due today. This report, which measures the change in the total quantity of domestic currency in circulation and in banks� deposits, is not particularly market-moving. However, it is correlated with interest rates since an increasing supply of money leads to additional spending and investment. Later on, this contributes to inflation which may cause the central bank to raise interest rates. An increase of 8.1% is expected to follow the previous reading of a 7.9% uptick.

The USD/JPY hit the ceiling near the psychologically significant 97.00 level yesterday before sliding lower. Slight improvements in US employment data allowed the JPY to regain ground against the USD towards the end of the day. Prior to this, the highly-anticipated economic data from Japan, the Tankan manufacturing report, gave the JPY a slightly weaker tone as it indicated that economic prospects are not as bright.

The Tankan manufacturing index rose from -58 to -48, falling short of forecasts at -43. The non-manufacturing index also failed to meet expectations at -26 as it inched from -31 to -29. Components of the report show that businesses plan to continue cutting down on spending and investment, implying a bleaker outlook for earnings and employment.

No economic reports are due until the end of the week. The JPY could sustain this weak tone for the rest of the day as demand for riskier assets rises ahead of the US NFP report.

Yesterday was a huge day for the JPY as it bullied all of the other so-called currency big boys to submission. The JPY managed to take out most or all of its losses for the past 5 days. A bearish engulfing candle (the most recent long candle (red) that towers over the green ones) is now noticeable in the daily charts of the samurai pairs.

Given the JPY�s strength, one might suspect that something spectacular happened in Japan yesterday. This was not the case, however, since Japan just sat on the sidelines yesterday in terms of economic reports. The events in the US (huge unexpected NFP unemployment change, etc) led investors back to the safety of Yellowstone�s and Akkido�s caves. The JPY surged as a result of the panic in the US.

No economic reports are due in Japan today. The US will also have a break today to celebrate its independence day. Trading of the JPY will be limited and constrained, in my opinion, for these reasons.

Yen trading was particularly reserved, just like most major currencies, as the US heads into its long Fourth of July weekend… Versus the dollar, the yen closed the week at 96.15 price level from its 95.81 open during the Asian session. Japan�s economic cupboard was completely bare last Friday, which also muted any movement in the currency�s price action.

No hard market-hitting economic data ahead this week. Because of this, the yen�s price action in the foreign exchange market would most likely be determined by degrees in risk appetite as well as the underlying fundamental background of currencies pitted against it. In any case, we will see Japan�s leading index for May later at 5 am GMT. The forecast currently stands at 77.00%, slightly higher than last reporting period�s 76.2%.

Early yesterday, we saw a mad dash to safety as the yen rallied strongly during the Asian and European session. The USDJPY pair opened at 96.15 and dropped as low as 94.67, before finally closing at 95.34. It appears that risk aversion continued to be the dominant market theme, as recent news has caused traders to finally see that global economic recovery will slow.

Japan�s Leading Indicators index was released yesterday, and had a reading of 77% for the month of May. This was in line with expectations and was an increase from previous month�s score of 76.2%. The report indicated that while the recession is easing in all 9 regions of Japan, conditions still remain severe. Economists believe that there will still be some instability as companies cut costs by lowering production and payrolls.

Later today, the Core Machinery Orders m/m is due at 11:50 pm GMT. Take note that machinery orders play a significant role in the Japanese economy. If orders rise, it signals that manufacturing activity will pick up. The forecast is that orders rose 2.3% last May. Also due later at 11:50 pm are the Bank Lending y/y and Current Account reports.

Safe-haven currencies, such as the USD and JPY, gained the upper hand as the market shifted back to risk aversion mode. Despite the lack of economic reports from Japan yesterday, the USD/JPY sank to the 95.00 mark as the USD faces threats of diversification in the G8 summit.

Core machinery orders were just reported to have slumped by 3% in June. Analysts expected this indicator to post an improvement of 2.3% after sinking by 5.4% in May. Japan’s current account surplus widened marginally from 0.97 trillion to 1.02 trillion, as the global downturn eroded demand for its exports.

Later on today, the Economy Watchers Sentiment index will be released. The reading is expected to climb from 36.7 to 38.1 on hopes for a sustained economic recovery for the Asian nation. The actual figure is due at 6:00pm GMT.

The JPY surged �like crazy� as market participants started to digest the global economy�s previously ignored substandard fundamentals. The JPY has been taking the role of a �safe haven� alone to itself and away from the USD as market participants begin to worry regarding the swell in US debt. The JPY took away more than 100 pips from the USD in just about an hour during the mid-part of the US session as investors exhibited their concerns.

The Economy Watchers Sentiment index which was reported yesterday came in at 42.2. The index was only expected to reach the 38.1 mark after registering a reading of 36.7 during the month prior. The index measures optimism among consumers and is based on about 2,000 surveys regarding the relative level of current economic conditions of workers. A score below 50 indicates pessimism. However, the improvement in the figure gave additional juice to the rise of the JPY.

No top tier economic reports are scheduled today in Japan. We might see further strength in the JPY if risk aversion in the global market persists.

JPY trading was mixed yesterday as the high-yielders staged a nice rally across the boards. Versus the USD, the JPY remained particularly range bound and just bounced a 130-pip range. Against the EUR, the JPY loss was pronounced as it lost almost 300 pips from its Asian session open price.

Economic data that came out of Japan wasn�t really given any attention to by traders. In any case, the report on preliminary machine tool orders showed that orders dropped by 73.1% in last June from the same month the year prior. The corporate goods price index y/y for June, which measures the average change in price by goods sold by corporations, printed a 6.6% decrease.

No economic data due for today. Still, don�t be certain that the boards will be quiet. It�s the end of the week and traders will be closing their books. With the G8 meetings underway, it would be prudent to expect some volatility as the foreign exchange markets close.

The yen made strong gains last week as people are becoming more anxious about the economic recovery. The USDJPY pair closed the week at 92.41, its lowest level since mid-February this year, while the EURJPY nearly hit 127.00 after opening the week at 134.29! Could we see the yen continue this strong run this week?

No economic reports were released last Friday from Japan. The yen was mainly driven by risk sentiment, and we saw the yen gain after a short retracement on Thursday.

Today, a couple of low-impact reports are coming out as the revised Industrial Production m/m and Household Confidence reports are due at 4:30 am GMT and 5:00 am GMT respectively.

Later this week, the BOJ will be releasing its interest rate decision on Wednesday. However, with rates already at just .10%, we cant really expect a rate cut… Be on the lookout for statements regarding the BOJ�s outlook of the economy. The last rate decision showed that BOJ had a more positive outlook on the economy. What could be said this time around?

The JPY returned some of its gains from last week as the USD/JPY rebounded from the 92.00 handle and the EUR/JPY bounced up from 128.00. Was this merely a short-term correction or a reversal signal?

Industrial production data for May was revised downwards from 5.9% to 5.7%. This report had minimal impact on the JPY, which kept climbing for the first half of the day. Household confidence posted an improvement from 35.7 to 37.6, beating the forecast at 36.8.

Despite the strong economic data from Japan, the JPY found itself tumbling down as the Nikkei fell for the ninth straight day yesterday. Asian markets stumbled on concerns about company earnings and doubts for a sustained global recovery.

No economic reports are expected from Japan today, which leaves JPY crosses vulnerable to risk sentiment. With a bunch of economic reports due for its safe-haven counterpart, the JPY has much to gain if US economic data disappoints. Otherwise, JPY pairs could be in the mood for consolidation as traders anticipate the BOJ monetary policy statement tomorrow.

It was a very tough day for the JPY as it got beat by most of the other currency players. Its only �win� came against the CHF. The JPY�s movement was very volatile especially in the US session given the mixed economic data results in the US. It then started to lose and concede following some better-than-expected earnings reports from Goldman Sachs and Johnson & Johnson.

No economic reports were due in Japan yesterday. The JPY was mainly driven by the market participants� sentiment in the capitals markets.

Today will be different with the Bank of Japan�s target interest rate decision. Having an almost nil interest rate of 0.10%, the bank has pretty much no room to slash it further. Given this and the bank�s already massive quantitative easing program, it is left with only a few options to try to perk up its economy. One of these few remaining options would be the extension of the emergency-credit programs to firms by at most 2 months. Such would provide some slack for both the firms and investors. Any extension of the bank�s debt programs would be bearish for the JPY. This, however, would be to their liking in a way.

The JPY took another beating yesterday as investors let go of the currency in favor of its riskier counterparts. The question is whether the sell-off would persist today, given the sharp depreciation of the JPY across the boards.

Interest rate announcements are usually a big deal for the market but it seemed that the Bank of Japan�s benchmark interest rate decision was considered a non-event by traders. With rates at an all-time low at 0.10%, it really has nowhere to go. In any case, the Bank of Japan lowered its estimate for Japan�s growth once again as the country�s export industry remains shaky. Economists believe that Japan�s interest rates will remain at very low levels well after the world recovers from the recession.

Today, the BoJ is set to release its monthly report at 5 am GMT. This contains the data the bank used in deciding what to do with the country�s benchmark interest rate. It also provides an inside look on how the bank sees the current and future economic situation of Japan.

The yen bounced back yesterday, after it got sliced up like a sushi roll the past couple of days. There was some volatility, especially during the US session when earnings reports helped create some market noise. Ultimately, the USDJPY and EURJPY pairs closed lower, at 93.78 and 132.63 respectively.

The BOJ released its monthly bulletin report yesterday. Once again, the BOJ expressed a somewhat optimistic stance, as it upgraded its outlook on the economy. The bulletin said that the BOJ said that it is very likely that the Japanese economy will improve over time.

No reports are scheduled for release today. With the market being very sentiment driven as of late, be careful of any shifts that could cause extra volatility as we end the week.

Political instability in Japan is making the JPY lose some of its safe-haven appeal. On the economic agenda, the BOJ’s monetary policy meeting minutes and trade balance data could spice up the price action of JPY pairs.

Several lawmakers are attempting to overthrow Prime Minister Taro Aso but failed to gather the required amount of signatures to do so. Confidence in the Prime Minister’s leadership has already been waning ever since the Japanese economy stumbled towards deflation. The conflict worsened after Taro Aso said that he is planning to dissolve the lower house of parliament soon.

The possibility of currency intervention remains a threat for the JPY, judging from the comments of the newly-elected Vice Finance Minister for International Affairs Rintaro Tamaki. “We�ll make judgments based on whether excessive movements in the currency market will adversely affect the economy. If you were to ask me if we�d never intervene, the answer would be no,” he said.

Minutes of the latest monetary policy meeting are due at 11:50 pm GMT today. This should provide more insight on the BOJ’s interest rate decision and economic outlook. Trade balance data is set for release on Wednesday 11:50 pm GMT. The surplus is expected to widen from 0.22 trillion JPY to 0.51 trillion JPY.

The JPY is commonly known by investors as a relatively �safe� asset. Well, it was totally not the case for the JPY yesterday as it lost its grip against ALL the major currencies. Then again, you can say that it was safe if you went short on it.

Japan was low-key yesterday in terms of tier one economic releases. Life was sucked out of the JPY due to an increase in risk appetite in the US capitals markets. The bondholders� last minute rescue of the CIT group together with the better-than-expected earnings results of several US firms enhanced confidence in the markets once again. The JPY was taken under as investors switched to higher yielding assets.

Details on the Bank of Japan�s monetary policy minutes were just released earlier today. In their meeting last month, the board members agreed that Japan�s economic conditions had stopped deteriorating. They also concurred that the BOJ should determine the length of their credit-policy measures individually since each measure has a different purpose and framework. Last week, the BOJ extended its debt buying program from banks until the end of 2010 to provide them more liquidity.

In the mean time, several US firms will report their second quarter earnings results during the US session. Fed Chairman Ben Bernake will also issue a speech. Positive earnings from firms and encouraging comments from Bernanke would once again spur risk appetite. Such would then be bearish for the JPY.

Volatility took the pair everywhere yesterday but one-directional it was not! It started out the European session at a weak note and lost some ground versus the EUR and USD. This did not last long though as JPY bulls just bought up the currency during the US afternoon trading session.

Later 11:50, we�ve got Japan�s trade balance for June on tap. Compared to other nations, Japan�s trade balance, which measures the difference in value between imported and exported goods, has a more significant value in determining the health of the country�s economy. The reason is simple: Japan�s export industry is the fourth largest in the world. The consensus is a 510 billion yen surplus, up from last reporting period�s surplus of 220 billion yen.

The yen attempted to make a strong push yesterday, but ended the day with minimal gains against the USD and EUR as ranges pretty much held for those pairs.

Late yesterday, the Japanese trade balance report was released. The release was in line with expectations, as Japan hit a surplus of �508 billion. It was the first time that the surplus widened in 20 months. The reason behind the increase was due to slowing down of the contraction in Japanese exports. Chinese growth � reported to be at 7.9% last quarter � has also helped spur demand for Japanese products. China is now currently Japan�s number one export customer.

The only report coming out from Japan for the rest of the week is the All Industries Activity m/m report. The report is a low impact report, so it will probably not have a significant impact on the markets. With the markets being heavily driven by risk sentiment as of late, watch out for any shifts in risk assessment.

The USD/JPY staged quite a strong rally yesterday while JPY crosses moved higher. The USD/JPY found itself back above the 95.00 mark as the JPY underwent a massive selloff.

Despite the lack of economic reports from Japan yesterday, the safe-haven JPY was dumped on account of the strong rally in US equities. The all industries activity index is due from Japan at 4:30 am GMT today and this report should have a minimal impact on the JPY. An increase of 1% is expected to follow last month’s 2.6% uptick. Expect JPY pairs to be strongly influenced by risk flows, as usual.