The fundamental picture has started to brighten for the world’s second largest economy with improving exports pushing the current account surplus to a two year high of 2534.2 billion yen
. Additionally, the measurement of leading indicators which looks at account inventory ratios, machinery orders and stock prices pointed toward continued improvement as it rose to 102.8 from 98.4-the highest since August, 2006. The domestic picture has also improved according to the Eco watcher’s survey which rose to 49.9-the highest in nearly three year. The improvement in the gauge that measures sentiment of retail workers, taxi drivers and other business cycle sensitive workers is a sign that export demand is translating into broader growth. However, domestic demand remains weak and that has the BoJ looking for ways to stave off deflation which includes a new loan program aimed at encouraging private banks to lend more to industries with growth potential.
The central bank will convene this week to determine future monetary policy and with declining consumer prices still a problem, expect policy makers to leave their target rate at 0.10%. In addition to the monetary policy meeting the economic calendar is full with meaningful but unlikely market moving releases. The second reading of first quarter GDP is expected to be revised higher to 1.4% from 0.9% as the economy continues to distance itself from the recession. However, the tertiary index is forecasted to have declined by 1.5% as the service sector continues to be inflicted by weak demand. Nevertheless, the yen’s fortunes will continued to be tied to risk sentiment and considering the prevailing concerns additional strength could be expected. Yet, risky assets regained their footing in the final hours of trading and improving global fundamentals could generate risk appetite and yen weakness.-JR