Core machinery orders fell by 5.1% to 834 billion yen in November, second largest since April 2016, mainly due to the non-manufacturing sector (exclu volatile orders) which fell by 9.4% MoM. (January 16th)
Corporate profits in Japan seem to be staging an unexpected comeback. The BoJ Tankan business condition DI for large manufacturers showed a first improvement in the last 6 quarters. Smaller sized companies, both manufacturers and non-manufacturers, also showed improvements in their business condition in December. These results strongly indicate that corporate profits in Japan may have renewed its peak in the current quarter. Corporate managers seems cautious through. Despite the likely record profits, they still decided to cut capital investments in FY2016 and they expect business conditions to worsen in the coming quarter. We tend to sympathize with their cautious view. Demands may have recovered somewhat in the second half of 2016 and yen did depreciate rapidly, but there is nothing hard to grasp on to have confidence in its sustainability. After nearly 4 yours, Abenomics has very little to show in terms of structural reforms. We continue to think that the growth in the Japanese economy lack robustness and the potential reward for taking risks seem limited.Read more..
Japan finally caught up with other OECD countries in adopting SNA2008, the latest international standard for national accounts. Prime Minister Abe must be regretting not to have speeded up the efforts. The new set of statistics shows that the economy was growing much faster in 2014 and in 2015 than previously estimated. The inclusion of Research and Development as a part of capital expenditure, rather than intermediate inputs, seems to have boosted both the level and the growth rate of the economy. While we would caution not to confuse a change in the definition of GDP as an actual change in the economy, the newly found growth does imply that the higher value adding parts of the economy such as research and development are growing more rapidly than the rest of the economy.Read more..
Prime Minister Abe and President-elect Trump shaking hands in NY probably encouraged the market sentiment that all will be well with US-Japan relationship. Indeed, the market developments since the US election result Tuesday last week has been favorable for the Japanese policy makers. We do not think such a smooth sailing will last for long however. Unlike the time when President Reagan took office, a strong dollar is a wrong policy for US. Inflation is not a visible threat and the dollar has already appreciated by more than 30% in the last 5 years, pushing the dollar to more than 10% above the average since 1970. In our view, the yen depreciation that took place in the last 10 days would quickly reverse once President-elect Trump realizes that a weaker USD would be more beneficial for his electorate. While PM Abe may be able to preserve US-Japan military alliance, Mr Trump is unlikely to be the savior of Abenomics.Read more..
The stock market may have liked the BoJ decision today as it decided to go easy on banks. However, we are doubtful if the positive market reaction would be sustained. In our view, the BoJ is effectively tapering its quantitative easing policy. By dropping two year time-limit to achieve the 2% inflation target, the BoJ will be less aggressive in its efforts to reflate the economy in future. By stepping away from negative interest policy, the BoJ is tying its hand to counter future yen appreciation. One issue is clear though. The BoJ has reached the end of the QQE road. It is no longer pursuing quantitative easing. At this point, the BoJ has two alternatives. One is to become passive, leaving the reflation effort to the government. The other is to somehow find a way to continue reflating the economy, perhaps by exploring a combination of fiscal and monetary policy tools. Today's decision indicate that the BoJ may be choosing the passive road, but it does not seem like the nature of governor Kuroda. We will see.Read more..
In their policy meeting on September 20-21, the BoJ will be essentially admitting that they can no longer pursue 2% inflation rate target as ardently as they have been. The financial market will probably react negatively as it perceives the change as a step toward tapering. In our view, the result could be similar to what we observed in the US “taper tantrum” in 2013.Read more..