Monthly Economic Review: Japan

Konnichiwa, forex traders! Aside from risk sentiment, news from China, and economic data, speculation on whether or not the Bank of Japan (BOJ) would be introducing more easing measures has been a major catalyst for the Japanese yen’s price action, causing forex traders to dump the yen when reports about further easing spread through the market and, conversely, loading up on the yen when reports about staying the course come out. So, what can we glean from the most recent data dump?

Growth

The final reading for Japan’s Q2 2015 GDP was revised to show a 0.3% contraction instead of a 0.4% contraction. While that’s seems nice and all, a contraction is still a contraction, and the current reading is also a severe disappointment when compared with the previous month’s 1.1% expansion.

Forex Chart - Japanese Quarterly GDP

The annualized reading doesn’t fare any better since it’s showing a 1.2% contraction after posting a solid 4.5% growth previously. According to the details of the report, the sudden year-on-year contraction was due to a 1.1% decrease in overall private demand and a rather painful 16.0% contraction in exports. On a quarterly basis, meanwhile, the main drage were a 4.4% contraction in exports, which subracted 0.8% to GDP growth, and a 0.3% decline in private demand due mainly to a 0.7% slide in private consumption, which removed 0.2% from GDP growth.

Forex Chart - Japanese Annual GDP

Employment

Japan’s jobless rate ticked higher to 3.4% in August (3.3% previous). The uptick was due to a 40K increase in the number of unemployed persons since the total labor force was essentially unchanged at 65.98 million, and the same can be said for the labor force participation rate, which held steady at 59.6%.

Forex Chart - Japanese Jobless Rate

Incidentally, the manufacturing sector lost around 16K jobs, which is the largest in absolute terms. The information and communications sector followed closely with 10K jobs lost, which represents around 6% of the said sector’s work force. But on a more upbeat note, the wholesale and retail sales industry hired 5K new workers, which could mean that wholesale and retail companies are expanding their operations in order to meet increasing consumer demand.

Consumer Spending & Sentiment

Speaking of consumers, consumer confidence in August is still below the 50.0 neutral mark, but it did increase to 41.7 (40.3 previous), with all sub-indices posting an increase as well. The “income growth” sub-index is still a major drag at 39.9, though. The said index also only increased by a very slight 0.3 from the previous month’s reading.

Forex Chart - Japanese Consumer Confidence

Household spending for August also posted a healthy 2.9% increase due to a surprising 8.6% increase for the “transportation and communication” component and a 15.2% jump for the “housing” component.

Forex Chart - Japanese Household Spending

The only sad part is that the month-on-month change in the value of retail sales was stagnant for the month of August (+1.4% previous) while posting only a 0.8% year-on-year increase (1.8%). Apparently, the main drag for the disappointing monthly reading was the 3.6% decrease in value for fuel sales due to lower oil prices. On a slightly happier note, all sub-components actually saw a  increase on an annualized basis. The only exception being the fuel component since it was a major drag at -10.6%.

Business Conditions & Sentiment

Japan’s industrial production contracted by 0.5% in August, which marks the second consecutive month that production has been on the red. On an annualized basis, however, industrial production is already showing a 0.2% increase after stagnating last month.

Forex Chart - Japanese Industrial Production

August may have been a bad month, but September could potentially be worse, especially for the manufacturing sector since Nikkei-Markit’s September manufacturing PMI report dipped from 51.7 to 51.0. The reading is still above 50.0, though, so the manufacturing sector is still expanding. The report noted, however, that “Production increased at the weakest rate in the current five-month period of expansion.”

Forex Chart - Japanese Manufacturing PMI

Moreover, the Tankan manufacturing index tanked from 15 points to 12 points for the month of September, which corroborates Nikkei-Markit’s PMI report. The only good news is that, the Tankan non-manufacturing index climbed higher to 25 points (23 points previous), so at least the services sector could potentially help to alleviate some of the pain.

Inflation

The annualized and monthly readings for headline inflation both printed a 0.2% increase. This is good news for the monthly reading since it means a recovery after dipping to -0.1% last month.

Forex Chart - Japanese Monthly CPI

This is bad news for the yearly reading, though, since it negates the BOJ’s expectations that inflation will be “rising on the whole from a somewhat longer-term perspective.” Furthermore, the low inflation levels have been one of the major reasons why forex traders have been speculating on further easing measures from the BOJ.

Forex Chart - Japanese Annual CPI

Summary & Potential Effects on the Forex Market

Overall, Japan seems to be in a bad spot right now, especially with regard to inflation and growth. Looking forward, consumer spending could help to keep the economy afloat, but Japan’s weakening manufacturing sector could continue to weigh-in. Also, the weakening manufacturing sector is closely linked to trade. And if you consider that Japan’s trade deficit keeps on widening, you pretty much get a gloomy picture for the Japanese economy and the yen.

Forex Chart - Japanese Trade Balance

Still, that doesn’t seem to stop forex traders from loading up on the safe-haven yen whenever uncertainty comes around, although demand for the yen has been dampened a bit due to speculation about further easing moves from the BOJ.

And while the BOJ has calmed the market a bit by saying that they won’t be introducing more easing measures, just remember that the same BOJ shocked forex traders everywhere when it expanded its stimulus program last year.