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Japan Consumer Prices Drop – A Threat To Bank Of Japan’s Price Stability Target

January 25, 2013 in Japan

Jpanese YenToday’s Consumer price index data released by Statistics Bureau, Tokyo showed a drop in the prices again in Japan during December 2012. The national consumer price index dropped by -1.0% against the same during December 2011. November had seen an year on year change of -2.0% and the market consensus were for a same drop during December as compared to the corresponding month of 2011. Though the drop of -1.0% was better than the previous month and also the market expectations but this was the seventh time during past 8 months when Japan saw the prices drop.

Today’s CPI reports of year on year change

Today’s CPI Releases



Previous Month

National Consumer Price Index (YoY) -December




National CPI Ex Food, Energy (YoY) -December




National CPI Ex-Fresh Food (YoY) -December




Tokyo Consumer Price Index (YoY)  January -preliminary data



Tokyo CPI ex Food, Energy (YoY)  January -preliminary data



Tokyo CPI ex Fresh Food (YoY) January -preliminary data




Drop in prices questions the practicality of Bank of Japan’s plans to control the deflation

On January 22nd the Bank of Japan had kept the interest rates same at 0.1% while the policy statement had mentioned that in order to achieve better stability in the prices BoJ has setup an inflation target of 2% on year on year basis. In the same policy meeting BoJ had announced an open-ended asset purchasing method In order to pursue aggressive and targeted monetary easing.

The continuous drop in the consumer prices put a question mark on the inflation target set by BoJ. Unless and until BoJ takes fast steps for an aggressive monetary easing, the targets seem to be farfetched.  On the other hand any drastic steps to weaken the Japanese yen may result in a currency war if other central banks start taking steps to counteract Japan’s initiatives.

Japanese yen weakened against the U.S. dollar further today and USD/JPY went as high as 90.68 during the Asian trading session before the pair went into a sideways mode.

The Bank of Japan’s Monthly Economic Report

January 24, 2013 in Japan

The Bank of Japan released its Monthly Economic Report on January 23, 2013.

The Bank conveyed its opinion of the current situation of the Japanese economy in mixed terms, though the tone of the report was definitely more optimistic compared to earlier publications.

The Current Situation

The bank pointed out that the rate of deceleration in the country’s exports has started slowing, while industrial production has shown signs of bottoming out.

There is continuing weakness in capital investment in the corporate sector, including a pressure on profitability that is notable among manufacturing businesses, said the report. The business sector continues to be cautious on the near term economic outlook, but signs of confidence can be seen to be emerging in some sectors. This may be due to the fall in the yen and a rise in the stock market.

Employment continues to be a matter of serious concern, more so since a recent improvement seems to be tapering off. Private consumption is showing signs of emerging strength, as indicated by rising auto sales during the recent months.

On a heartening note, public investment has shown a rising trend and there is a pick-up in the housing market.

The report was worried about price trends which continue to signal that the Japanese economy is struggling through a mild deflation.

Policy Action

The Japanese Government intends to:

  • Complete the reconstruction efforts after the earthquake and tsunami disasters
  • Direct the economy into a virtuous cycle of growth and wealth creation, and
  • Regain for Japan its status as a strong economy.

The path to these objectives would need:

  • Correction of an undue appreciation in the value of the yen
  • Overcoming deflation through prompt and flexible management of economic and fiscal policy
  • Policy co-ordination between the Government and the Bank of Japan to overcome deflation and spur sustainable economic growth
  • Fixing the price stability (inflation) target at 2% as decided in the meeting with the Bank on January 22, 2013
  • The introduction of an “open-ended asset purchase” program to achieve aggressive monetary easing.




The Bank of Japan’s Decisions

January 22, 2013 in Japan

Finally, the result of the much-awaited deliberations of the Bank of Japan has been made public.

Prime Minister Shinzo Abe pretty much had his way with the Bank of Japan as apparent from the key decisions that are now known.

Inflation is now targeted at 2%, as was anticipated, and one which was vociferously advocated by Mr Abe.

The Bank of Japan will also embark on a massive asset purchase binge effective January next year. A monthly 13 trillion yen purchase plan will include 2 trillion yen account Japanese Government Bonds and 10 trillion yen for Treasury Bills.

The effect of the news pressured Japanese stocks (the Nikkei 225 was down 0.67% at the time of writing) and pushed up the yen (the key USDJPY pair was trading at 89.099).

Japan’s Worsening Regional Economic Outlook

January 15, 2013 in Japan

The Bank of Japan dimmed its view of the economic conditions prevailing in its regional economies based on a continued slowdown in exports amidst a deflationary domestic environment.

The assessment for eight out of nine economies was cut by the BOJ, this time being the second consecutive quarter for a downward revision. Only the Hokkaido region remained unchanged from the previous assessment.

In fact, BOJ Governor Masaaki Shirakawa said at the quarterly conference of regional managers: “Exports and factory output are declining as overseas economic growth continues to slow.”

He indicated that the Bank may have to resort to monetary easing in order to revive the economy. According to sources, the Bank is likely to expand quantitative stimulus a sixth time while hiking its permissible inflation ceiling to 2% at the ensuing meeting on January 21.

The Bank may also have to pay heed to Prime Minister Shinzo Abe’s demands for bold and constructive measures to get the flagging economy back on track.


The Rise Of Japanese Yen – Is The Worst Over For Japanese Exports And Japan Economy?

January 14, 2013 in Japan

Year 2012 proved a difficult year yet again for the Japanese economy. While a strong Japanese Yen has been bad for the exports, the disputes with China over the islands in the East china sea came as a big hit to the Japanese exports.

The decline in Japanese exports

Japanese exports

In 2010 China had displaced the U.S. as the biggest market for Japanese exports. The dispute about the ownership of inhabited islands in the East China sea  resulted in strong protest from China and in the boycott of Japanese goods. The exports fell heavily and the U.S. displaced China as the biggest market for Japanese exports.

Japanese exports and yen

Japan has no other way but to focus on other markets to lower down the dependency on China for the exports. A strong yen comes as an obstacle here again..

Plans to weaken the Yen

On January 8th, 2012 Japanese finance Minister Taro Aso mentioned about Japan’s plans to use the foreign exchange reserves to buy bonds issued by the European Stability Mechanism (ESM) and euro-area sovereigns to weaken the Japanese Yen. This is a good strategy as Europe would welcome this move for their financial stability. If Japan goes for a direct intervention by increasing their Forex reserves to weaken it then it may again face criticism from other countries as happened during  the Japanese currency intervention during 2011. A direct intervention may also invite reactions of other countries as they may decide to take a counter step of buying Japanese yen against their currencies and that may lead to a cold currency war.

Effects of Weakened Yen

A weakened yen is good for Japanese manufacturing industry to help their exports and hence is good for the economy in general, however any excessive weakness will not be good for the Japanese economy.

Increase in Japanese imports

Monthly imports during 2011-2012

Japanese imports

In the recent past there has been a sudden growth in Japanese imports. The average imports of Japan during 1979 to 2012 has been 3398.6 billion Yen per month. Fuel has the major share of Japanese imports with 32% of the total. The average imports during 2012 were quite higher than the average a weaker yen makes the imports quite expensive.

The rise in Japanese imports

Rise in Japanese imports

Breakup of Japanese imports

  • Fuel: 32%
  • Machinery: 19%
  • Food: 9%
  • Manufactured goods: 9% (9 percent),
  • Chemicals: 8.5%
  • Raw materials: 8%
  • Clothing: 4%

Increasing trade deficit

With the increase in the imports Japanese trade deficit is going dangerously high.  The following chart shows the historical balance of trade data since 2000.

Japan trade deficit since 2000

Japan Trade deficit

Japan trade deficit at 20 years high

The following chart shows the historical trade deficit since 1980:

Japan Trade deficit historical data

The following chart from Japan Ministry of finance gives a clearer picture of the changing trend of Foreign trade at one glance:

Japanese foreign trade

Japanese Foreign trade

The above chart shows the data till 2011 but the latest data can also be seen at the Japan Ministry of Finance site.

Weakened Yen – threat to imports and manufacturing cost

The import of fuel is expected to further go up because of more dependency on crude oil to generate power is even more now after the earthquake and tsunami of March 2011 because of the shutdown of Nuclear plants. The oil consumption. The weakened yen is a threat for rising energy generation cost and hence manufacturing. This is true not only for fuel imports but all industrial imports.

Any drastic and sudden weakness of yen would also be considered as weakness of the economy and may send wrong signals to the foreign investors.

Japanese Yen Update

USD/JPY Update

The price action has been mainly below 85.00 level since the end of September 2010. Only once during early April 2011 it had tried to break over that level but had failed at 85.52 to touch a low of 75.36.After this continuous weakness,  USD/JPY not only broke above 85.00 but went as high as 89.67. The resistance of 90.00 psychological level may bring some consolidation or keep it in some sideways move, but overall a test of 90.00 is expected to take place. Any decisive break over 90.00 and sustained price action above that may target first the resistance level of 92.86 and then probably a strong resistance zone of 94.60/94.90.

EUR/JPY Update

EUR/JPY had been below 115.00 level since July 2011 and during July 2012 the currency pair had gone as low as 95.12. The recent jump has not only taken out the key psychological resistance of 110.00 but also 115.00. The move to 119.98 came as surprise but the momentum indicates that EUR/JPY will take out this key psychological level also. The next key resistance for EUR/JPY will be 123.32 where the pair had failed during April 2011.

Whatever said and done, the underlying uncertainties about Euro zone’s debt crisis and increasing unemployment levels have not vanished. Germany is not doing bad but then Germany alone does not represent the Euro. Sooner or later another fall in Euro/Japanese yen cannot be ignored.

GBP/JPY Update

Similar to other Japanese crosses GBP/JPY has also been seeing new recent highs. The current price action has entered the territory of the psychological resistance of 145.00. The pair hit 145.81 during the Asian session of Monday, January 14th. The momentum indicates that the barrier of 145.00 may not hold for long. The eyes may be soon set for the strong resistance which the currency pair had witnessed during April 2010 i.e. 145.98.

Desperate Times May Cost the Bank of Japan its Independence

December 23, 2012 in Japan

“We expect (the BOJ) to discuss it at the next policy board meeting.”

That is incoming Japanese Prime Minister Shinzo Abe’s brief to the Bank of Japan with respect to his 2% target for inflation.

Abe’s statement, spoken during a television interview today, is backed up with a simple threat in case the BOJ does not toe his line: “”If it doesn’t, we’ll revise the BOJ Law and set up a policy accord with the central bank to agree on an inflation target. We may also seek to have the BOJ held accountable for job growth.”

Is he taking a page out of the US Fed’s book by binding the bank to the twin guideposts of an inflation target and an unemployment rate?

Note that at its recent meeting the US Fed too decided to keep its ultra-low interest rate unchanged “at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Is this an unspoken opinion that the BOJ has been less pro-active in engaging with the country’s economic problems compared to its US peer across the ocean?

Apart from the stick of changing the law to cut the BOJ’s wings, Abe also stated that he will handpick someone more amenable to his own views when current BOJ Governor Masaaki Shirakawa’s term expires in April next year.

Japan’s economy has been plagued by deflation and recent data points to slowing exports and GDP. The economic mire has probably pushed Abe to consider radical steps to reignite growth, and he is unlikely to let the much-hallowed ‘independence’ of the central bank stand in his way, given the massive mandate that swung him back to power at the last general election.

Japanese Elections – Right Wingers Storm Back

December 17, 2012 in Japan

The Liberal Democratic Party, led by Shinzo Abe, won the Japanese General Elections, igniting hopes that he will take steps to revive the deflation afflicted economy and weaken the yen to make the country’s exports more competitive.

Mr Abe said before the elections that he would take steps to fight the recession and to weaken the yen and that to this end he would allow inflation to scale as high as 3% and get the central bank to go on an unlimited money printing spree, if so required. He also gave indications that he would assume more effective control of the Bank of Japan, through statutory changes if so necessary. It is likely that he may install a hand-picked, and like-minded, Governor for the bank next April.

These factors led analysts to believe that the Japanese stock market could head higher and the yen much lower.

Japanese GDP Data – It Gets Worse

December 10, 2012 in Japan

Japan reported today a contraction of 3.5% in GDP for the July-September quarter. This, coming on top of a downward revision to its estimate for the previous quarter, indicates that the economy is taking baby steps towards a recession, with economists apprehending a further slowdown in the last quarter.

The poor show on GDP growth follows a diminishing current account surplus seen in October, primarily due to a widening trade deficit on account of weak export performance.  Capital spending in the economy during the third quarter rose only 2.2% compared to a rise of 7.7% in the previous quarter.

These statistics are likely to increase the pressure on the Bank of Japan to adopt measures to stimulate the economy. The state of the economy already figures high in the debates preceding Japanese elections on the 16th of this month. The Bank of Japan is to conduct a policy meeting on December 19-20.


Japan Gross Domestic Product Declines Further

November 12, 2012 in Japan

Keeping the trend of recent poor economic data, today’s economic releases showed that the Annualized Gross Domestic Product fell in Q3 more than the expectations. The preliminary report showed a drop of -3.5% against the 0.7% rise which took place in Q2. The expectations were for a drop of -3.4%. The quarter on quarter change in the GDP also fell in Q3 to -0.9% which was in line with the consensus but quite less than the Q2’s change of +0.2%.

Tertiary Industry Index:

Today’s reports showed that the month on month change in Tertiary Industry Index in the month of September was 0.3% and was better than the expectations that September will see no change. However this change was less than the positive change seen in the month of August which was 0.4%.

Global and Local Economic Disturbances:

Adding to the impacts which the uncertainty in the Euro zone is causing globally, Japan has been having their own local issues and somehow the cycle is not stopping. Be it last year’s tsunami or the recent tensions with China and Korea about the disputed ownership of the islands in the East China sea and Sea of japan respectively.

On one side when the issues continue, a very strong yen is adding to the damages. Last week’s economic releases showed that the machinery orders fell to an unexpectedly  low level in the month of September. The year on year change in the machinery orders was -7.8% while the expected drop was -4.9%, against the drop of -6.1% in the month of August.

Apart from the current poor data, there are undercurrent which may not be showing the negative results immediately but we may witness the impacts after some time.  China contributes to 12% sales of Toyota, 27% of Nissan and 20% of Honda. Toyota might have raised the forecast of net profit for the current Japanese financial year ending in March 2013 to 780 billion Japanese yen (approx. US$ 9.75 billion) but the real impact of already dropping sales in China due to the disputes and disturbances may show up later.

All these car makers have already cut down their forecasts for China business but gradually the impacts will become greater as they start affecting the ancillary units and automobile part makers in a bigger way.

Japan Economic Outlook

November 8, 2012 in Japan

Steep Drop in Machinery Orders and Other Indicators

The drop in the machinery order was much worse than expected and also much more than the previous release. The year to year change in the machinery order was -7.4% while the expected drop was -4.9% as against the previous -6.1%.

The Eco Watchers Survey for October also showed a negative outlook for current situations as well as for overall outlook. The Survey results for the current situation were down to 39.0 against the previous data of 41.2, while the consensus were for 40.5. Eco Watchers Survey for the outlook was also down to 41.7 from the previous 43.5.

Ongoing Economic Distress

On one hand the overall continuous disturbances after Lehman shock to Tsunami of 2011 to Euro crisis and parallel disturbances because of the conflicts with China and Korea because of islands ownership issues have been hurting the economy. On the other hand the extremely strong Yen is taking it’s toll on the exports.

Stronger Yen and Japanese Exports

The peak of USD/JPY during the Japanese financial year of 2009-2010 was 101.45 (first week of  2009). The same for 2010-2011 was 94.98 (first week of May, 2010).  This 6.38% increase in the Japanese Yen worsened further during the financial year 2011-2012 where the USD/JPY’s peak was 85.52 during first week of  2011 i.e the Yen got further stronger by 9.95%. And this is only in the terms of the peaks of the year. The low was 75.36 during the current financial year.

Even if we consider a drop of 100 average to an average of 80, in simple terms the Japanese exports go 20% costlier. And japan is an export driven economy.

Japanese Stock Market

Nikkei Stock average of 225 top companies had it’s high of 2010 as 11313.98. In 2011 the peak was 10891.60 and this dropped further as 2012 peak as of now at 10197.80. A drop of over 9.86% from 2010 to 2012, considering only the peaks.

Overall the signs are indicating towards a recession with very little to look up for.

Isn’t a time that we see some reversal of Yen pairs and yen crosses?


Asian Session – Poor Tenkan Data From Japan

October 1, 2012 in Japan

Negative Tenkan Data From Japan

Tenkan data releases from Japan showed weakened sentiments.

The Tenkan Outlook for Large Manufacturers was down to -3 from the previous 1 released in June. Though the released data was better than the general consensus but at the end what counts is the net weakness or strength.

Similarly the Tenkan Index for large manufacturing was down to -3 from previous -1.

The Outlook for non-manufacturing sector for quarter 3 was down to 5 from previous quarter’s 6 while the Tenkan Index for non-manufacturing sector remained same as the previous release at 8.

Japan Exports:


The strong Japanese Yen and the economic crisis in Europe and situations in China has affected the Japanese exports greatly. The exports to Europe have seen a decline of 22.9% while the exports to China which is Japan’s largest trade partner have seen a decline of 9.9% in August.

Today’s Economic Releases from U.S.

Today’s main economic releases from U.S. will be about ISM Manufacturing PMI and Markit Manufacturing PMI apart from Construction Spending and FOMC member William’s speech.

Japanese Yen against US Dollar:

The Monday Asian session till now has not seen much change in USD/JPY exchange rates. The currency pair had close at 77.91 on last Friday. Today’s during the beginning of Asian session the pair saw a spike to 78.09 but now ranging quite close to the last week’s closing price.

Considering the weak Tenkan data some gains may be expected but overall bearish pressure should keep the currency pair in check from any substantial gains.