Monthly Economic Review: Japan

Concerns over China have caused many forex traders to load up on the yen due to Japan’s status as a safe-haven country. But what about Japan’s underlying fundamentals? Is Japan still on track for a recovery? Well, read on and find out.

Growth

Forex taders who have been bullish on the yen cried their eyes out when Japan’s preliminary Q2 2015 GDP contracted by 0.4% quarter-on-quarter, but the previous quarter’s reading was significantly upgraded from +0.6% to +1.0, so it ain’t too bad. On an annualized basis, meanwhile, Japan’s economy contracted by around 1.6% (+4.5% previous).

Forex - Japanese GDP

A closer look at the GDP report shows that the big year-on-year decline was due to a broad weakness in private demand, with only the “private residential investment” sub-component showing an 8.0% growth. Another major drag on GDP growth was the massive 16.5% decline in exports.

On a quarter-on-quarter basis, weak overall private demand (-0.4%) and shrinking exports (-0.8%) were also the major drags on GDP growth, and Q3 GDP isn’t exactly starting on an upbeat note since Japan’s trade deficit in July widened to ¥268.06B from ¥70.5B previously. The only positive thing is that exports grew by around 7.6% year-on-year.

Forex - Japanese Trade Balance

Employment

After ticking higher to 3.4% back in June, Japan’s seasonally-adjusted jobless rate dipped back into 3.3% in July. While this looks good on the surface, digging deeper into the report paints a different picture since the number of unemployed people actually stayed roughly the same at 2.20 million (2.22 million previous), but Japan’s labor force participation rate dropped to 59.6% (60.0% previous), so the decline in the jobless rate was just due to more people leaving the labor force altogether rather than fewer unemployed people or more people getting jobs.

Forex - Japanese Jobless Rate

Consumer Spending & Sentiment

According to Statistics Japan, July’s household spending is still in the red at -0.2% year-on-year, but at least it’s not as dismal as June’s 2.0% drop. Still, it was a disappointment to many forex traders and market analysts since the general consensus was for household spending to climb back into the green with a +0.9% reading.

Forex - Japanese Consumer Spending

The Japanese Cabinet Office’s consumer confidence index took a hit too, dropping to 40.3 in July from 41.7 back in June. All sub-indices were broad down: overall livelihood is down 1.3 points to 38.1, income growth is slightly down by 0.7 to 39.6, employment is down 2.6 points to 44.7, and willingness to buy durable goods is down by 1.1 to 38.8.

Forex - Japanese Consumer Sentiment

On a more upbeat note, retail sales in July increased by 1.6% year-on-year (+1.0% previous) and 1.7% month-on-month (-0.6% previous). Even better, almost all retail components saw a monthly increase. The only exception was the motor vehicles component since it saw a 1.8% decline, so I guess cars weren’t in demand back in July.

Business Conditions & Sentiment

Looks like Japanese businesses didn’t get a break either since total industrial production in July slowed by 0.6% (+2.3%) on a monthly basis, which is the first decline in two months. The decline was due to decreases in several components, namely, electronic parts and services, production and business oriented machinery, and transport equipment. Year-on-year, industrial production also only saw a 0.2% increase, which is much less than the 2.3% increase previously. Manufacturing production, in particular, only saw a 0.2% increase in July after increasing by 2.4% back in June.

Forex - Japanese Industrial Production

Looking forward, things may get better for Japanese businesses since Markit’s manufacturing PMI for August climbed a bit higher to 51.7 from 51.2 previously, thanks to “new order growth accelerating to a seven-month high” and “supported by increases in both production and employment.” The manufacturing sector is being supported only by domestic demand, though, since overseas demand slowed further.

Forex - Japanese Manufacturing PMI

Another good piece of news is that Markit’s services PMI for August jumped higher from 51.2 to 53.7 due to a broad increase across most components. Activity growth, in particular, “accelerated to the strongest since October 2013.” The only sad thing is that employment levels took a slight hit.

Forex - Japanese Services PMI

Inflation

Well, it seems like Bank of Japan Governor Haruhiko Kuroda’s boast that inflation will accelerate “considerably” in the coming months didn’t have much in the way of substance since July’s headline inflation reading just sank lower to 0.2% from 0.4% previously. The core reading likewise sank lower to 0.0% from 0.1% previously. Scanning through the inflation report, most items saw a slight increase, but energy-related items continue to apply deflationary pressure since “fuel, light and water charges” dropped by 4.7% while “transportation and communication” slumped by 2.3%.

Forex - Japanese CPI

Oh, just a note to 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

Overall, the most recent data dumps shows that Japan’s recovery encountered a major road bump, especially with regard to inflation and GDP growth. This could make longer-term, fundamentals-based forex traders a little more hesitant when it comes to loading up on the yen. Moreover, the IMF’s mission chief to Japan also expressed that the IMF may downgrade its growth forecasts for Japan in the next World Economic Outlook report.

In the shorter term, the yen could still be the de facto safe-haven currency of choice for most forex traders to run to during times of uncertainty. After all, Japan meets the three major criteria for a safe-haven country, and China’s woes probably won’t be going away anytime soon.

  • ForExchange

    Hi Forex Gump,

    that was a great article. Lately I have been thinking a lot on why the Yen got stronger. Your article exactly targeted my question: how much of the appreciation was due to strong Japanese fundamentals and how much was because of risk off sentiment?

    Well the numbers do not lie, it is mostly because of risk off sentiment. As I sidenote, looking back the numbers in a longer term, I have to say the negative numbers are still less negative as they were 1-2 years ago. This means there is some progress which might be enough to push the Yen a bit further against the poorly performing commodity currencies.

    Have a nice Sunday,
    FE

    • Thanks for the positive feedback, glad to know you liked this one! Yep, the numbers still aren’t that impressive but risk appetite was so weak that the yen still managed to advance, especially against the comdolls. Besides, traders seemed hesitant to buy up the other safe-haven (USD) ahead of the NFP release and FOMC statement, which also explains why the yen drew additional support in the risk-off environment. Hope you had a great weekend!

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