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THE TAKEAWAY: Lower economic outlook > Risk aversion buying > JPY Strengthens

Although new CPI, household spending and employment figures from Japan pulled the market in different directions, the drop in Tankan manufacturing and services indices combined with a lower services outlook sapped risk appetite. The benchmark Nikkei 225 opened +0.75% at 9889.

EVENT

ACT

EXP

PREV

Household Spending (YoY) (MAY)

-1.9%

-1.7%

-3.0%

Jobless Rate (MAY)

4.5%

4.8%

4.7%

Job-To-Applicant Ratio (MAY)

0.61

0.60

0.61

Tokyo Consumer Price Index (YoY) (JUN)

-0.2%

-0.1%

-0.1%

Tokyo CPI Ex-Fresh Food (YoY) (JUN)

0.1%

0.2%

0.1%

Tokyo Consumer Price Index Ex Food (JUN)

0.1%

0.1%

0.1%

National Consumer Price Index Ex Food (MAY)

0.1%

0.0%

-0.1%

National Consumer Price Index (YoY) (MAY)

0.3%

0.2%

0.3%

National CPI Ex-Fresh Food (YoY) (MAY)

0.6%

0.5%

0.6%

Tankan Large Manufacturers Index (2Q)

-9

-7

6

Tankan Non-Manufacturing Index (2Q)

-5

-4

3

Tankan Large Manufacturers Outlook (2Q)

2

2

2

Tankan Non-Manufacturing Outlook (2Q)

-2

0

-1

Tankan Large All Industry Capex (2Q)

4.2%

2.3%

-0.4%

Although national inflation rose from estimates, with non-food prices rising at the fastest pace since December 2008, investors were aware of the Bank of Japan’s continued policy. In a statement issued last month when prices rose at near-record pace since the recession, Bank of Japan Governor Shirakawa mentioned that short-term changes should not be allowed to affect long-term policies. This effectively ruled out any chances of a rate hike from its current level of 0.10%.

Weaker_Japanese_Manufacturing_and_Services_Indices_Sap_Risk_Appetite_body_Picture_5.png, Weaker Japanese Manufacturing and Services Sap Risk Appetite

National CPI Excluding Fresh Food. Chart generated with Bloomberg LP Professional Terminal.

Although second manufacturing outlook declined as expected, its sharper fall indicated continued headwinds faced by the domestic manufacturing and industries sector after the March 2011 Tohoku Earthquakes, and may prompt additional rebuilding support by both the government and the Central Bank.

Weaker_Japanese_Manufacturing_and_Services_Indices_Sap_Risk_Appetite_body_Picture_6.png, Weaker Japanese Manufacturing and Services Sap Risk Appetite

Tankan Large Manufacturing Index. Chart generated with Bloomberg LP Professional Terminal.

Continued weakness in the economy was compounded by an unexpected drop in services sector outlook. Because services account for around 75% of Japan’s output, investors saw the weaker forecast as a possible driver of prolonged overall economic weakness, as tertiary sectors often lead the rest of the economy.

Weaker_Japanese_Manufacturing_and_Services_Indices_Sap_Risk_Appetite_body_Picture_7.png, Weaker Japanese Manufacturing and Services Sap Risk Appetite

Tankan Large Enterprises Non-manufacturing Outlook. Chart generated with Bloomberg LP Professional Terminal.

The Japanese yen mildly strengthened against the US dollar following the report on the heels of risk aversion. Gains were limited due to the near-resolve of the Greek debt crisis. However, investors await June Chinese Manufacturing PMI later today at 0100GMT, expected at 51.5 versus a previous 52.0 and June ISM Manufacturing, expected to weaken to 52.0 versus a previous 53.5 to drive market sentiment on the first day of the third quarter.

Weaker_Japanese_Manufacturing_and_Services_Indices_Sap_Risk_Appetite_body_Picture_8.png, Weaker Japanese Manufacturing and Services Sap Risk Appetite

USDJPY 1 minute chart; first vertical line indicates employment and inflation figures and second indicates time of Tankan survey releases. Chart generated with FXCM Strategy Trader.