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Japanese Data Slashes Chances for BOJ Hike in December

Monday, 04 December 2006 08:53:52 GMT  |  Terri Belkas, Currency Analyst

Capital Spending (Q3) (23:50GMT; 18:50EST)
Actual:                  12.0%
Expected:            15.3%                                                    
Previous:             16.6%

Labor Cash Earnings (YoY) (OCT) (0:30GMT; 20:30EST)
Actual:                   0.0%
Expected:             0.2%
Previous:              0.1% (RH)

How Did the Markets React? 

Signs that the Japanese economy is failing to expand flooded the market once again today, as capital spending slowed more than expected in the third quarter and wage growth stagnated in October. With Japanese economic growth largely dependent on investment by companies to pick up the slack of a weaker export sector and dismal consumer spending, today’s release not only increased the likelihood that third quarter GDP would be revised lower, but also took a December hike by the Bank of Japan off the table.  Furthering the neutral bias for the BOJ was the 0.0 percent posting of labor cash earnings in October, as the lack of payroll growth will do little to give households incentive to increase purchases and adds to concerns regarding Japan’s snail-like pace out of deflation. While Japanese equity markets essentially brushed off today’s data, JGB yields initially took a sharp dive while yen gradually lost strength throughout the session.

 

Bonds - Japanese 10-Year Government Bonds

Yields on 10-year JGBs dropped to a low of 1.590% at the market opening in response to the disappointing results of Japanese capital spending in the third quarter, as the primary driver of Japanese expansion looks to be slowing. However, rates slowly recovered and prices slipped lower throughout the Asian trading session and brushed off the tepid labor cash earnings results, which furthers a neutral bias on benchmark rates by the Bank of Japan as a relatively tight employment market fails to impact wages. As a result, consumption has little hope of picking up substantially in the near term. The decline in 10-year JGB prices were most likely due to speculation the significantly low yields on the bonds will limit demand at an auction of the securities tomorrow.

FX – USD/JPY

 

FX markets showed the most sustained reaction to Japan’s economic today, as weak capital spending and stagnant wage growth left USD/JPY to bounce from the 115.00 level during the Tokyo session up to 115.72 in early European trading. Economic expansion in the third quarter was largely the result of nonresidential fixed investment, and with the slowdown in capital spending, there will likely be downward revisions to the initial GDP estimate of 0.5 percent during the quarter. Furthermore, wage growth at a standstill for the year in October does little to boost hopes for a resurgence of consumer spending to help pick up the slack in the export sector. Combine this with last week’s tepid CPI results and yen is left quite vulnerable, despite the recent greenback sell off, as the chances for a December hike by the Bank of Japan are essentially null and void.

 

Equities – Nikkei 225 Index

 

Exporters in Japan led the country’s benchmark index to edge lower today as Friday’s US ISM manufacturing report bolstered the probabilities of a significant slowdown in the US economy, which would subsequently lead to lower demand for imported products. The Nikkei 225 ended the day 0.1 percent lower at 16,303.59, making up more substantial losses accrued at the opening of the markets when an influx of sell orders sent the index tumbling. Sony, the consumer electronics and entertainment giant, was down 1.5 percent to 4,550 yen. Additionally, Nissan Motor dropped 1.4 percent to 1,393 yen after announcing weak domestic and US sales figures for November. On the flip side, consumer finance companies continued their strong rise of recent days, indicating the sector may be beginning to recover from a disastrous year when it was hit by a government crackdown. Aiful leapt 5.4 percent to 3,880 yen while Promise climbed 3.3 percent to 4,020 yen.

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