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Strong Japanese IP Boosts Yen, Equities, JGB Yields

Wednesday, 29 November 2006 09:11:45 GMT  |  Terri Belkas, Currency Analyst

Japanese Industrial Production (OCT P) (23:50GMT; 18:50EST)

                                MoM       YoY

Actual:                    1.6%      7.4%

Expected:             -0.4%      4.9%      

Previous:              -0.7%      5.2%

How Did the Markets React? 

Japanese markets took quickly to the industrial production release this morning, as factory output in October surged 1.6 percent, pushing the annual rate up to a two year high of 7.4 percent. The figures were far stronger than expected and came as a relief to traders bullish on the Japanese economy following a spate of dismal data over the past week. The increase in output was led by the auto sector and by semiconductor producers, as two of Japan’s biggest carmakers, Toyota and Honda, said they boosted production to meet demand for fuel-efficient vehicles. However, today’s report runs counter to the whopping 7.4 percent drop in machinery orders in September and recent weakness in exports. Machinery orders are also a leading indicator of capital expenditures, which are due to be released next week and will attract the attention of the markets for clues as to the health of the corporate spending. Since consumer spending is essentially at a standstill, Japanese expansion increasingly depends on business growth. Nevertheless, JGB yields and the Nikkei jumped at the market opening, which was shortly after the release of the output data. FX market reaction was much more rapid with both the USD/JPY and EUR/JPY pairs dropping immediately.

 

Japanese 10-Year Government Bonds

Fixed income markets in Japan dropped lower at the market open in response to stronger-than-expected industrial production data. The solid data sent JGB 10-yr yields up from a 2-month low of 1.645% to 1.695% at one stage as traders priced in the potential of a BOJ rate hike before year end. However, given the substantial amount of tepid economic data out of Japan lately, the central bank is far more likely to hold off until next year. As a result, 10-year JGB yields eased slightly to 1.670% with price closing out the day .30 lower at 101.094. On the flip side, if Japanese CPI proves to indicate price pressures when released on Thursday, markets may consider tighter monetary policy in the cards, which would subsequently leave JGB yields to surge.






FX – USD/JPY, EUR/JPY

 

Yen gained immediately against the dollar on the release of better-than-expected Japanese industrial production, though the most marked and rapid reaction was in the EUR/JPY cross, as the pair dropped from a record high of 153.41 to an Asian session low of 152.53. The decline in USD/JPY was nothing to scoff at either, with price falling more than 50 points over the course of an hour. However, yen gradually gave up much of its gains against the greenback going into early European trading. While the Japanese data bodes well for the Land of the Rising Sun, the Bank of Japan is still highly unlikely to tighten monetary policy in December as a slowdown in consumption puts broader economic growth at risk, and higher interest rates would do little to help the situation. Nevertheless, BOJ policy board members have consistently made comments reiterating a desire to hike rates, indicating that 0.50% is not far on the horizon for Japan.

Equities – Nikkei 225 Index

 

Japan’s benchmark equity index, the Nikkei 225, broke the 16,000 barrier for the first time in over a week thanks to unexpectedly strong domestic production figures, bringing the stock average to close 1.4 percent higher at 16,076.20. Automakers and other export-oriented companies led gains, as they are the sectors likely to profit most from stronger output, with Toyota climbing 1.5 percent to 6,930 yen and Nissan rising a more modest 0.7 percent to 1,399 yen. Additionally, chip-related stocks such as Advantest increased 1.5 percent to 6,060 yen and Elpida Memory jumped 3 percent to 5,550 yen. These export-related areas were also the biggest losers earlier in the week, as the combination of a stronger yen and a slowdown in US looked to hurt international sales of Japanese products.

 

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