Konnichiwa, forex friends! The Japanese yen has recently been dishing out a mighty good beatdown against its forex rivals due to the prevalence of risk aversion in the global market. But what about the fundamentals? Are they driving up demand for the Japanese yen as well? Let’s take a look, shall we?
Growth
The final reading for Japan’s Q3 2015 GDP was revised higher from -0.2% to +0.3% quarter-on-quarter (-0.1% previous quarter), which was a goods news for forex traders who are bullish on the yen since that means that Japan is no longer in a technical recession.
The annualized reading, meanwhile, was slightly upgraded from an expansion of 0.8% to 1.0% (-0.5% previous quarter). Looking at the GDP report, the public sector was actually more of a drag to GDP growth (-0.1% vs. +0.2% unrevised) due to a larger drop in public investment (-1.5% vs. -0.3% unrevised). However, this was offset by a stonger private sector (+0.2% vs. -0.5% unrevised), mostly due to a turnaround in private non-residential investment (+0.6% vs. -1.3% unrevised).
Employment
The labor situation for the November period was a bit of a disappointment since the jobless rate climbed higher to 3.3% (3.1% previous) while the labor force participation rate climbed lower from 59.9% to 59.4%.
The number of employed people also got trimmed from 63.96 million to 63.58 million (not seasonally-adjusted) while the number of registered unemployed people increased from 2.06 million to 2.17 million. All those readings, together with the fact that Japan’s working-age population remained flat at 110.82 million, imply that a lot of Japanese people were downsized and some of them ultimately gave up on looking for jobs, which hints at an underlying weakness in the Japanese economy. Also, annualized wage growth flattened out during the November period after a 0.7% rise during the previous month, which is gonna take a toll on both consumer spending and inflation.
Business Sentiment & Conditions
The preliminary industrial production report from the Japanese Ministry of Economy, Trade and Industry shows that annualized industrial production was in positive territory again (+1.6% vs. -1.4% previous) after three consecutive months of ever worsening contractions.
Looking forward, business confidence appears to be steady since the Tankan manufacturing index was maintained at +12 while the Tankan non-manufacturing index was likewise unchanged at +25 for the December period.
The December period manufacturing PMI report from Markit/Nikkei agrees with the Tankan manufacturing index since it remained unchanged at the 20-month high 52.6. The same can be said for the Markit/Nikkei services PMI report, although it printed a very slight decrease from 51.6 to 51.5. On a more interesting note, the services PMI report noted that “For the first time in three months, employment at service providers increased in December” and that “the rate of job creation was the sharpest in 15 months.” Looks like forex traders can look forward to a more upbeat December period jobs report.
Consumer Spending & Sentiment
Japanese consumers are still a pessimistic lot since the Japanese Cabinet Office’s consumer confidence index is still below the 50.0 neutral mark, but sentiment did improve to a two-year high of 42.6 during the November period.
All four sub-indices saw modest increases, but all four also fall below the 50.0 mark. Consumer spending was also lackluster during the November period, with the value of retail sales printing a 1.0% year-on-year decrease.
Overall household spending in November also decreased by 2.9% year-on-year, which marks the third consecutive month of drops. The report also shows that all sub-components got hit, with only housing (+18.4%) and education (+0.4%) in the green.
Inflation
Japan’s November headline CPI increased by 0.3% on an annualized basis, which is the same reading as back in October. As always, energy-related components are still the main drags, with the “fuel, light and water charges” components down by 6.8% (-7.0% previous) and the “transportation and communication” index down by 2.8% (-3.3% previous).
The core reading (headline less fresh food) was able to finally climb back into positive territory (0.1% vs. -0.1% previous), however, while the so-called “core-core” reading (headline less food and energy), which the BOJ has been keeping an eye on, climbed higher to 0.9% (0.7% previous), so the underlying inflation rate seems to be promising. Oh, for the newbie forex traders out there who are wondering what the sudden slump after March 2015 was about, just know that CPI got an artificial boost from Japan’s 8.0% consumption tax. Just subtract 2.0% from the readings if you want to compare ’em.
Summary & Conclusion
Overall, the Japanese economy has been seeing some improvement when compared to my previous Monthly Economic Review, but the recent readings for consumer spending and the Japanese labor market were less than pleasant, so there’s still an underlying weakness in the domestic front. However, PMI readings indicate that things may probably get better down the road. And that, combined with the prevalence of risk aversion in recent weeks and the BOJ’s defiant refusal to expand their easing program, has been helping to keep the yen afloat.