Special Report-Japan’s business sentiment has improved
Here are the latest Financial News:
Deflationary pressures continue in Japan with February CPI reported to have declined by an annual rate of 1.2%. This marked the 12th consecutive month that Japan’s CPI has declined. The Japanese government has been pressuring the BOJ to take actions to combat deflationary pressures. Earlier in the month the BOJ elected to increase the size of its lending operations but decided not to increase its purchase of Japanese bonds. The expansion of the lending operation is passive and unlikely to have any significant impact on deflationary pressures in Japan. If the BOJ wanted to get more serious about combating deflation the central bank could buy Japanese bonds or set an inflation target. The purchase of bonds would increase Japans money supply. Setting an inflation target would help the central bank steer inflation towards the target and let investors more easily anticipate interest rate changes. In theory an inflation target can lead to increased economic stability. The minutes for the March BOJ policy meeting indicate that the BOJ board was split on the outlook for the Japanese economy and need for additional easing of monetary policy. A number of the BOJ board members are reluctant to take aggressive easing actions as the Japanese economy shows signs of recovery. Monday Japan reported that retail sales for February rose at the fastest annual rate in 12 years. Tuesday Japan reported mixed economic data with industrial production and household spending declining more than expected and unemployment unchanged. Last week Japan reported a sharp increase in January all industry activity. This week’s main focus for JPY trade will be the release of Japans March Tankan business survey for the first quarter. The Tankan business sentiment survey is one of the key Japanese economic reports that influence BOJ monetary policy decisions.
The Tankan survey is a gauge of business confidence and corporate sentiment in Japan. Japans March Tankan survey will be released on April 1st and is expected to improve to -16 compared to -24 last quarter. Improvement in the March Tankan survey is expected because the Reuters Tankan manufacturing sentiment index rose to its highest level since June 2008 and Japanese exports are rising. The Reuters Tankan manufacturing index shows that Japanese companies are less gloomy about the Japanese economy with the index improving 19 points to -8.The BOJ Tankan survey has a 95% correlation to the Reuters Tankan manufacturing index. In addition, Japan reported that February exports rose by 45.3%. Japan’s export growth turned positive for the first time since August 2007.The rise in Japanese exports confirms that Japan’s economy is gradually improving.
The December Tankan survey sent mixed signals on the outlook for Japan’s recovery. December business sentiment improved and capital spending expectations declined. CAPEX (capital) spending is the fuel of economic growth. The BOJ will be looking closely at the CAPEX component of the March Tankan report. March CAPEX spending is expected to improve to-11.5% from -13.8% last quarter. Based on the Reuters Tankan manufacturing survey and improving Japanese export sales the March Tankan survey is expected to show marked improvement. How the March Tankan survey impacts BOJ policy is open to debate. A sharp improvement in the March Tankan business survey will encourage the BOJ to hold monetary policy steady and resist government pressure to ease. The Tankan index however will likely remain in negative territory. The fact that the Tankan survey remains in negative territory could encourage some of the BOJ board members to consider additional easing of monetary policy. The March Tankan report may not resolve the divisions on the BOJ policy board. On balance we expect the March Tankan survey to reduce concern about the Japanese recovery and encourage the BOJ to remain on hold. JPY is trading at two month low versus the USD pressured by rising US bond yields and concern about Japan’s debt. Improvement in the March Tankan survey may boost short-term demand for JPY as the report could diminish uncertainty about the outlook for Japan’s economy and encourage the BOJ to resist government pressure to ease monetary policy.
Source: Easy Forex
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