Monthly Economic Review: Japan

Konnichiwa, fellow forex traders! In a recent speech, Bank of Japan (BOJ) Governor Haruhiko Kuroda said that he expects the 2.0% target to be hit within the first half of 2016 and that further easing moves would be unnecessary. Oh, really? Well, let’s see if the latest data dump supports such an optimistic statement.

Trade

Based on the (not so user-friendly) data provided by the Japanese Ministry of Finance, Japan’s trade deficit in June 2015 narrowed to around ¥69 billion from May 2015’s ¥217 billion and June 2014’s ¥834 billion, thanks to global exports increasing by 9.5% (2.4% previous) and global imports contracting by 2.9% (-8.6% previous).

Exports to China, Japan’s main trading partner, jumped by 5.9% (1.1% previous) due to increased demand for electronics while imports from China increased by 6.9% (1.6% previous).

JP trade balance

Exports to all of Asia, which bought roughly half of Japan’s overseas stuff, increased by 10.1% (3.3% previous), but imports from the rest of Asia also climbed by 7.1% (-2.9% previous). Exports to the U.S., another major trading partner, increased by a whopping 17.6% (7.4% previous) as demand for pharmaceuticals and Japanese cars picked up. Imports from the U.S., meanwhile, saw a more modest 14.9% increase (11.5% previous).

Employment

The latest employment data were a wee bit disappointing given that the seasonally-adjusted jobless rate for June showed a very slight uptick from 3.3% to 3.4%. Still, a jobless rate of 3.4% is considered very low and it’s an improvement when compared with June 2014’s 3.7%.

Japan also showed strength overall since the labor force participation rate held steady at 60% even though the total labor force in June ballooned to 66.48 million from last month’s 66.24 million. On an even more upbeat note, the number of unemployed people in June 2015 was 2.24 million, which is 210,000 less (8.6%) when compared to the previous year.

JP jobless rate

Consumer Spending & Sentiment

Household spending in Japan is back in the red at -2.0% after posting a 4.8% increase back in May, which was a disappointment to forex traders and market analysts alike since the consensus was an increase of around 2.0%. Apparently, the greatest drag came from “clothing & footwear” since it printed a 13.3% decline, so I guess fashion isn’t a top priority for the ordinary Japanese right now.

This reminds me… I once did some research on Japanese culture (via anime, manga, and soap operas), and I found out that the Japanese are obsessed with their education, cats, giant robots, and anything kawaii (cute). Interestingly enough, education was the primary contributor to household spending since it posted a solid 9.4% increase. Unfortunately, I couldn’t find an entry for giant robots and anything kawaii. Maybe they fall under the “culture & recreation” component?

Getting back on point, the retail sales reading for June was another disappointment to forex traders since it declined by 0.8% month-on-month (1.7% previous). On a year-on-year basis, it continued the downtrend by posting an increase of only 0.9% (3.0% previous).

The latest consumer confidence survey from the Japanese Cabinet Office didn’t really offer any good news either since the index posted a 41.7, which is below the 50.0 neutral sentiment mark. On a slightly more upbeat note, the current reading saw a slight increase from May’s reading of 41.4.

JP consumer confidence

Looking at the historical trend, the most recent low-point was back in November 2014 at 37.7. After that, consumer confidence began to increase to the lower 40s level and has been holding there ever since.

Business Conditions & Sentiment

Japanese businesses seem to be doing okay, with the Tankan manufacturing index at 15 points (12 points previous) and non-manufacturing index at 23 points (19 points previous). Both are above zero and increasing, which means that business confidence is also increasing.

In addition, Markit’s final manufacturing PMI reading for June also showed an increase from 49.9 to 50.1, which means that business are expanding. Markit also recently posted the preliminary reading for July, and it looked promising because PMI increased further to 51.4, but this is till subject to revision.

Furthermore, industrial production in June increased by 0.8%, which is much better than May’s 2.1% decrease, and it also grew by an impressive 2.0% on a year-on-year basis (-3.9% previous).

JP production

Inflation

The headline reading for annual inflation fell by 0.1% to 0.4% in June while the core reading remained steady at 0.1%. Energy prices seem to be the problem since the main drags were “fuel, light and water charges” and “transportation and communication,” which decreased by 3.1% and 2.0% respectively.

In the Tokyo-area, core inflation declined by 0.1% (0.2% previous). Transportation and communication had less of an impact (-0.9%), but “fuel light and water charges” showed a painful 5.6% decline year-on-year and a stinging 2.9% decline on a month-on-month basis.

JP CPI

Oh, just a note for the newbie forex traders out there: that sudden drop in April was due to the 8% consumption tax artificially boosting the previous inflation readings by roughly 2.0%, so the reading for March should be viewed as 0.3%, not 2.3% and so on.

Summary & Potential Effects on the Forex Market

Given that inflation fell rather than increased, the yen could be feeling a bit of bearish pressure from forex traders in the coming days. But the fact still remains that the other economic indicators are beginning to paint a pretty picture.

Employment and business sentiment, in particular, are rather robust. Unfortunately, consumer spending isn’t very strong due perhaps to the dampening effect caused by that nasty consumption tax. The gist of it all is that the Japanese economy is showing some signs of a recovery, but hitting the BOJ’s 2.0% inflation target by 2016 seems to be too good to be true for now.

  • ForExchange

    Hi Forex Gump,

    I think the JPY shows exactly the great advantage technicals have over fundamentals. Based on fundamentals (and your write up confirms that) I was short on AUDJPY and NZDJPY but closed them with a little win after holding onto them for a couple of weeks. If JPY cannot even beat the two weakest currencies then what can we expect against the stronger currencies?

    I do believe the best is to wait and when we see trends then we have a confirmation for better Japanese outlook.

    Thanks for the analysis and enjoy the rest of the weekend,
    FE

    • Yep, even if fundamentals favor further gains, it seems that the yen’s rallies are already overdone. Thanks for checking out my blog and for sharing your thoughts as always!

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