Daily Economic Commentary: Japan

Trading Discussion News and Economy
145

Zoom! The JPY shifted to high gear as risk aversion returned and fueled a safe-haven rally. Although Japan did not release any economic reports last Friday, the JPY strengthened against all of its counterparts before the week came to a close.

Last Friday, BOJ official Kazuo Momma mentioned that the decrease in public works spending could cause economic growth to slow down. I expected that these pessimistic words would derail the JPY and was surprised to see otherwise. Apparently, these cautious comments combined with weak fundamentals triggered a run of risk aversion in the markets. Yikes! Here we go again…

Today, Japan will release its final industrial production reading at 4:30 am GMT. No revisions are expected for its 2.6% reading in November. Japan won’t be releasing any other reports today but do watch out for BOJ Governor Masaaki Shirakawa’s speech at 12:30 am GMT. The central bank head could reiterate its monetary policy stance, citing its goals to combat deflation and return to sustainable growth.

Household confidence is expected to improve from 39.5 to 40.3 in December. Watch out for the actual figure due Tuesday 5:00 am GMT. Japan’s tertiary industry activity index is due later on, at 11:50 pm GMT. The consensus is a 0.1% slump in November, down from the 0.5% growth seen in the previous month.

Lastly, on Friday, we’ll see Japan’s all industry activity index, which is expected to post a 0.1% uptick for November. This would be a humble gain compared to the 1.2% increase in October. If the actual figure disappoints, the JPY could lose its recent gains… unless risk aversion pushes for a safe-haven rally, of course.

146

After staging a major rally to conclude last week’s trading, the yen corrected and lost some of its Friday gains versus most of the other majors yesterday. For today, the yen’s price movement maybe dictated by the major economic releases in the UK, Canada, and New Zealand. Both the UK and New Zealand will publish their latest inflation tallies while the BOC is slated to decide on its overnight bank interest rate.

In Japan (5:00 am GMT), data on the household confidence for the month of December will be issued. Consumer confidence, as measured in the index, is seen to have improved to 40.3 from 39.5. An improvement in confidence is usually bullish for the yen since households tend to spend more given an upbeat economic outlook. Be wary, however, because the past four estimates have overshot the actual confidence results. Such could be bearish for the yen if something like that happens again.

  At 11:50 pm GMT, Japan’s November [tertiary industry index](http://www.babypips.com/forexpedia/Tertiary_Industry_Index_-_Japan) will be due. The index measures the change in the total value of services purchased by businesses. Weak spending in the services sector usually translates to lower employment rates and can also be interpreted as a sign of lower consumer spending in the future. November’s account is seen to fall 0.1% after logging a 0.5% gain in October. Such drop, therefore, could place some selling pressure on the JPY.
147

The yen traded in a mixed fashion in yesterday’s trading session. While the yen was able to post some gains against the euro, it was sold off against the pound and the dollar.

The household confidence report for December released yesterday printed worse-than-expected results. It showed that confidence dwindled down to 37.6 instead of rising to 40.3. The reading was also worse than November’s reading of 39.5, marking the third consecutive decline.

Meanwhile, Japan’s tertiary industry index for November revealed a drop of 0.2%, slightly lower than the 0.1% decrease initially predicted. The tertiary industry index measures the monthly change in the value of services businesses avail.

No economic data due from Japan today so the currency would probably be primarily driven by flows of risk aversion and news coming out of other major economies.

148

The yen benefited from a run of risk aversion yesterday, as it posted some nice gains across the board. The USDJPY remained steady while the EURJPY dropped by over 150 pips.

No high impact news is due from Japan for the rest of the week. Be on the lookout for shifts in risk sentiment, as that’s what’s been driving the market the past couple of days. I’m keeping my ears open for any more news from China. It was news that China would curtail bank lending that helped spur risk aversion yesterday. Take note, China plays a key role in global demand, so if the Chinese government keeps on making moves that will limit their growth, this could lead to slower recovery. This in turn, may cause traders to buy up the USD and JPY as they diversify their asset away from higher yielding currencies.

149

The Yen reigned supreme yesterday as it rallied against its major counterparts. Risk aversion, arising from China’s intention to tighten their monetary policy, boosted the safe-haven currencies. With the US likely to follow in China’s footsteps, the Yen emerged as the stronger performing safe-haven currency.

Based on US President Obama’s words yesterday, the US might also come up with bank lending restrictions in order to prevent a new credit bubble. This move, which could result to a slowdown in the US economy, caused the Yen to rally on risk aversion.

Japan will release its all industries activity index at 4:30 am GMT today. The index is expected to post a mere 0.1% uptick in November after rising by 1.2% in the previous month. Recall that the tertiary industry index, which was released a couple of days ago, came in slightly weaker than expected and this could mean we might see a downside surprise in the overall activity index.

150

Investors last Friday sold on news despite the better-than-expected earnings reports of several high profile US firms like Google, AMD, Capital One Financial, Amex, GE, and McDonald’s. The US capitals markets fell to its worst single-session loss, benefiting the ‘safer’ currencies like the dollar and yen.

Japan’s all industry activity index in November, which was earlier reported, came in line with the 0.1% forecast despite relatively weak tertiary industry index tally. In any case, the recent score did not have much impact on the yen’s short term valuation.

Tomorrow, the BOJ will make a decision regarding its monetary policies. The bank is widely expected to maintain its interest rate at a low of 0.10%. There are reports, however, which suggest that the bank is open to expand further its quantitative easing and bank credit program. The yen’s surge against the other majors is said to be dampening sentiment so an increase in liquidity could prevent the currency from rising any further. Any indication of this in the bank’s upcoming statement could of course be bearish for the yen.

On Tuesday, Japan’s December trade balance will be released. Japan’s trade surplus is seen to have expanded to ¥610 billion from ¥490 billion. A surplus in the country’s trade account could help fill in the government’s huge budget deficit. Such, therefore, could also give the yen some additional support.

On Wednesday, another top tier report in the form of the country’s retail sales figure will be due. Sales at a retail level are projected to have posted a 0.3% gain in December after falling by 1.0% in the month prior. If a growth in this account can be sustained in the coming months, the BOJ could eventually put a plug on its non-traditional expansionary measures.

A bunch of Japanese economic data will be published on Thursday. Year-on-year household spending is projected to have expanded by 1.6% in December. While this figure is positive, Japan’s national CPI figure in December continues to be weak. The index is projected to come in at -1.3% in December from -1.7% while the Tokyo core CPI is also seen to improve slightly to -1.8% from -1.9% in January. On s separate note, the country’s unemployment rate is expected to rise to 5.3% from 5.2%.

151

With the exception of the GBPJPY, the yen pairs were unable to pick a direction in yesterday’s trading session. It seems that currency traders chose to remain on the sidelines as they await the BOJ’s interest rate decision today.

The bank, as I’ve said in my update yesterday, is widely expected to keep rates steady at 0.10% as the economy begins to recovery. Although rumor has it that the bank is considering to extend its quantitative easing program… If they show any hint later of furthering their QE program, I suspect we’d see some serious yen selling across the boards…

Also today at 11:50 pm GMT is the country’s trade balance. The trade balance measures the net difference in value between exported and imported goods for a given period. A positive balance indicates a surplus, which means more goods were exported than imported. The forecast for December is a surplus of 610 billion yen, up from the 490 billion yen surplus in November.

152

Thanks to the risk aversion wave, the yen was able to pocket some nice gains against its western counterparts yesterday.

Like I keep mentioning in my other updates, the wave of risk aversion was in reaction to the report that China asked some of its banks to increase their reserve ratio. Apparently, China is very concerned about growing too fast, which is putting them at risk of going through an asset-bubble burst similar to the US.

In other news, Japan’s credit outlook was downgraded to “negative” by Standard & Poor, a global credit rating agency. The agency said that Japan’s huge $10 trillion dollar public debt could lead to higher borrowing costs in the future.

Japan’s problems do not end there… The BOJ, after keeping rates steady, said that deflation is putting the ongoing economic recovery at risk. The bank said that prices probably won’t be rising anytime soon so they will be maintaining their extremely accommodative monetary policies.

For today, expect to see Japan’s retail sales report tonight at 11:50 pm GMT. The forecast is that retail sales finally grew by 0.3% in December. If the retail sales report comes out with a positive figure, it would mark the first increase since September 2008.

153

Mixed emotions were felt by the JPY as its upbeat trade balance figure was followed by a disappointing retail sales report. The JPY’s recent rally against its safe-haven rival, the USD, came to an end when Japanese retail sales unexpectedly fell in December.

Although Japan’s trade balance was slightly weaker than consensus, the good news is that Japanese exports surged by 12.1% year-over-year in December. This marks the first annual increase in exports in over a year, disproving speculations that the rising JPY would hurt exports. Exports to Asian nations, such as China, grew at its fastest pace in a decade, compensating for the 7.6% drop in exports to the US.

Retail sales, on the other hand, surprisingly fell by an annualized 0.3% in December. As the indicator failed to hit the consensus of a 0.3% year-over-year increase, it marked its 16th month in consecutive declines. Analysts say that Japan’s unstable labor conditions are most likely the reason behind the slowdown in spending.

Today, Japan will release several economic reports starting 11:15 pm GMT. First, it will report its manufacturing PMI for January. No consensus was given but if the actual figure beats the previous reading of 53.8, the JPY could recover its recent losses.

Next, a report on household spending will be released at 11:30 pm GMT. It could show that consumer spending rose by 1.6% year-over-year in December, slightly lower than the 2.2% annualized growth in the previous month.

Tokyo core CPI and Japan’s overall core CPI are also due 11:30 pm GMT. Tokyo core CPI is projected to fall by 1.8% while Japan’s core CPI is estimated to drop by 1.3% on an annualized basis. This would indicate that price levels continue to fall, although at a more moderated pace, suggesting that deflation could still be a prevailing problem for Japan.

Lastly, the preliminary industrial production report is due 11:50 pm GMT. It could show that industrial production grew by 2.5% from November to December, higher than the 2.2% increase previously reported.

154

The yen once again was the currency of choice in yesterday’s trading. It actually started weak as the markets rebounded from the Fed’s outlook upgrade. A bunch of disappoint economic data in the US, however, caused investors to flee back to its safety.

Several reports were issued earlier today in Japan. First was the Japanese manufacturing PMI for the month of January. The index for this month softened to 52.5 from 53.8, indicating a tapering business activity in the manufacturing sector.

Next is Japan’s household spending in December which showed a gain of 2.1% on a year-over-year basis. Despite the jump in spending, the Tokyo core CPI continued to fall. January’s Tokyo core CPI currently stands at a dismal -2.0%. The national core CPI shows a similar state of falling prices with a score of -1.3% over the same period. Given the figures above, Japan may need its households to spend a lot more to carry back the general prices of goods of services to normal levels.

Preliminary industrial production in December likewise fell below the 2.5% consensus with only a 2.2% gain. The previous month’s tally was also negatively revised to 2.2% from 2.6%.

The only other positive account in Japan is its unemployment rate. The country’s unemployment rate in December surprisingly improved to 5.1% from 5.2% despite the overall fall in general prices.

The yen got some additional boost following the release of the above reports due to risk aversion.

Later at 3:30 am GMT, BOJ Governor Masaaki Shirakawa will deliver a speech at the Research Institute of Japan, in Tokyo. Traders and investors would most likely look into his speech for clues regarding the potential moves of the BOJ. Given the yen’s current strength and Japan’s poor economic state, it’s possible for the governor to throw in some ‘soft intervention’ to try to halt the yen from gaining further against the other majors.

At 1:30 pm GMT, the US will publish its 4Q GDP result. The US’s economy is seen to have grown by 4.5% during the quarter. Such gain could some risk taking in the markets, benefitting all the other currencies except the dollar and the yen.

155

The yen once again was the currency of choice in yesterday’s trading. It actually started weak as the markets rebounded from the Fed’s outlook upgrade. A bunch of disappoint economic data in the US, however, caused investors to flee back to its safety.

Several reports were issued earlier today in Japan. First was the Japanese manufacturing PMI for the month of January. The index for this month softened to 52.5 from 53.8, indicating a tapering business activity in the manufacturing sector.

Next is Japan’s household spending in December which showed a gain of 2.1% on a year-over-year basis. Despite the jump in spending, the Tokyo core CPI continued to fall. January’s Tokyo core CPI currently stands at a dismal -2.0%. The national core CPI shows a similar state of falling prices with a score of -1.3% over the same period. Given the figures above, Japan may need its households to spend a lot more to carry back the general prices of goods of services to normal levels.

Preliminary industrial production in December likewise fell below the 2.5% consensus with only a 2.2% gain. The previous month’s tally was also negatively revised to 2.2% from 2.6%.

The only other positive account in Japan is its unemployment rate. The country’s unemployment rate in December surprisingly improved to 5.1% from 5.2% despite the overall fall in general prices.

The yen got some additional boost following the release of the above reports due to risk aversion.

Later at 3:30 am GMT, BOJ Governor Masaaki Shirakawa will deliver a speech at the Research Institute of Japan, in Tokyo. Traders and investors would most likely look into his speech for clues regarding the potential moves of the BOJ. Given the yen’s current strength and Japan’s poor economic state, it’s possible for the governor to throw in some ‘soft intervention’ to try to halt the yen from gaining further against the other majors.

At 1:30 pm GMT, the US will publish its 4Q GDP result. The US’s economy is seen to have grown by 4.5% during the quarter. Such gain could some risk taking in the markets, benefiting all the other currencies except the dollar and the yen.

156

The yen traded mixed last Friday, losing during the Asian session but quickly fought back and retraced all of its losses when the US trading session rolled along. All in all, the yen ended the week flat against the US dollar but managed to post some gains versus the euro and the pound.
BOJ Governor Masaaki Shirakawa’s speech last Friday proved to be a non-event as he dodged any talk about the yen’s recent rally and any direct mention of market intervention. There were hints that he was still concerned about the issue though. He said that the BOJ will take swift and decisive actions to stabilize the financial markets in case negative concerns start to surface.

Looking ahead the week, no high level economic data will be coming out of Japan so expect the yen’s price action to be largely driven by market sentiment and news coming out of other major economies, especially the US.

157

The yen took a hit yesterday as risk appetite was the name of the game in yesterdays trading sessions. Yen crosses all rose, with the GBPJPY cross rising over 100 pips.

According to Bank of Japan economist Kazuo Momma, Japan’s economy is still struggling as local demand is weak, which has led to weak consumer spending. He said that export demand alone will not lead Japan to sustainable recovery. Furthermore, Momma said that deflation remains a risk and that this is the top priority of the BOJ.

With no major news coming out, look out for swings in risk sentiment. As we saw yesterday, sentiment can change on a dime, so be aware of what is happening in other markets.

158

The Yen scored four knockout victories as it crushed its major counterparts yesterday. Average cash earnings fell in December, sparking a run of risk aversion that benefited the Yen.

Wages in Japan slumped by 6.1% year-over-year in December, much worse than the consensus of a 2.6% drop. This marks the 19th consecutive month in wage declines. Many speculate that even an increase in employment won’t be enough to spur consumer spending now that employers are slashing wages. Furthermore, the report shows that large Japanese firms trimmed workers’ bonuses by almost 15%, the largest cut in December bonuses since 1959. Ouch!

Japan won’t be releasing any economic reports in the next 24 hours so expect changes in risk sentiment to be the major factor driving Yen price action. With the US set to report a couple of high-impact reports today, risk appetite could surge if better than expected results are seen.

159

The yen traded somewhat flat yesterday though it still incurred a small loss against the other major currencies. The biggest loss that it had was versus the dollar. The USDJPY rose and closed at 90.98 from 90.38.

No economic reports were due in Japan yesterday. Japan’s economic calendar will be report-free today as well. Still, the yen might experience some volatility due to the major economic events in the UK, euro zone, the US and Canada. Both the BOE and ECB will have their interest rate decision later. Canada’s December building permits and the US’s initial jobless claims for the week ending January 30 will also be issued later. A possible resumption of risk aversion could likely be bullish for the yen.

160

Risk aversion, oh how the yen loves it! Concerns on bulging budget deficits and debt problems in the euro zone revisited the markets yesterday, causing currency traders to pour back their funds into the safety of the yen. The yen staged stellar rallies against its western counterparts, particularly the euro and the pound.

Although the overall trend is down, the yen’s move yesterday was pretty strong and a soft correction could be in the cards today… at least until the US releases its NFP report. Be on your toes today fellow traders, as we know how sentiment can shift on a dime.

No economic data was released yesterday but expect to see Japan’s leading indicators report for December at 5:00 am GMT today. The report tries to predict the direction of Japan’s economy by using a combination of 12 economic indicators, some previously released. The forecast is a reading of 93.7, slightly higher from November’s 90.7 reading.

161

After a day of superb gains versus the EUR and GBP, the JPY was merciful in Friday’s trading session. The yen posted minimal gains after attempting to hit new highs. Can the yen sustain this momentum or will it give back its winnings this week?

The leading indicators report was released midway through Friday, coming in close to initial estimates. The report had a score of 94.0%, up from 91.7% from the previous month, indicating that the economy is improving slightly.

Not much high impact reports coming out from Japan this week. Earlier today, the current account was released and printed a surplus of just ¥1.10 trillion. It was expected that the surplus would be at ¥1.27 trillion. Could this be an effect of the yen’s strong appreciation as of late? Remember, Japan is heavily dependent on its exports and thus, would prefer to have a weaker currency in order to stimulate foreign demand.

Watch out for core machinery orders data due tomorrow at 11:50 pm GMT. Early estimates are for an 8.2% increases in orders this past December, which would be a great improvement from November, when orders fell by 11.3%.

162

Movement of yen pairs was relatively calm yesterday as they took a break after their sharp dives last week. The absence of top-tier reports from the economic calendar made for a quiet day in the markets.

Only the Economy Watchers sentiment index was released from Japan yesterday. The report showed that sentiment improved from 35.4 to 38.8 in January, indicating that workers are becoming less pessimistic about economic conditions in Japan.

Today, the preliminary machine tool orders data will be released. Last December, a whopping 63.4% annualized increase in total value of new orders placed with machine tool manufacturers was seen. Could the January figure top that? Find out during the actual release at 6:00 am GMT.

Also due today is the core machinery orders data. An 8.1% rebound is expected for December, following a decline of 11.3% seen in November. Better than expected results could allow the Yen to flex its muscles against its counterparts. Watch out for the results at 11:50 pm GMT.

163

Like its big cousin in the West, the dollar, the also yen called in and slacked versus the other majors in yesterday’s trading. The broad base rally in the US capitals markets led investors to leave the safety of the yen and dollar.

Japan’s core machinery orders surprisingly skyrocketed by 20.1% in December after sliding by 11.3% during the month prior. The jump in orders may not attract a sustainable flow of capital investments in Japan. Still, the recent score is high and should be taken positively at least in the short term.

The yen, however, continued to weaken following the report as the surprise rise in the figure sparked some risk taking in the Japanese markets.

No other economic reports are due in Japan today. The yen’s movement, of course, may be dictated by the major events in the UK and the US.

164

After two days of losing, the yen was able to secure some gains in yesterday’s trading session. It found itself on the winning side of the stick by the end of the US trading session against the euro and the pound. Still, the move looks like it will be short-lived, as the yen is starting to lose quite a bit of ground…

No data was released yesterday and Japanese banks will be out on holidays to celebrate National Foundation Day so Japan’s economic calendar will clear as the bright blue sky again!