So yesterday saw the release of a lot of Japanese data to close out the month, and I think I will summarize the month a little bit later, given that it started in a very particular manner. Before we get to my impressions though, a quick summary:
The data was overall better than or meeting expectations, but didn’t highlight any massive surprises or structural shifts overall. The unemployment rate was below expectations/previous values at 3.5% with a marginal increase in the Jobs-to-Applicants Ratio from 1.09 to 1.1 to back it up. Household spending only fell by 4% YoY (vs expectations of 5.1%) with a 0.9% uptick MoM. (The expectations were for no growth in spending MoM). CPI was as expected or marginally below, and retail sales beat expectations by increasing 1.4% YoY (vs. 1.2% expected, but still below 2.3% prior growth, and a 1.4% decline MoM). Preliminary industrial output managed 0.2% monthly growth versus expectations of a 0.6% decline, and a YoY figure showing a decrease of 1.0%. The major problem is that companies are forecasting marginal monthly declines going forwards…
Construction spending and housing starts however were great data, with spending increasing by 15.7% (against a prior decline by over 40%, but still an increase) and housing starts falling significantly less than estimates or prior values, reflecting 12.3% lower housing starts on expectations of a 15% decrease. So, what will this all likely mean for the Japanese economy?
Sorry for the curve ball, but there is one other development that needs addressing before getting into the data:
The impact of oil pricing on the Japanese economy:
There are, as far as I can tell, three simultaneous levers being pulled when oil prices move. For the sake of relevance to the OPEC summit result, we’ll use negative changes to illustrate these movements.
- Direct effect: Lower energy costs for consumers, which will give them more domestic purchasing power.
- Direct effect: Lower energy- and raw material costs for companies, which will increase corporate profits on exports and probably on domestic goods as well.
- Indirect effect: The deflationary forces of lowered energy costs might make the Bank of Japan more likely to expand central bank actions or wording to generate inflation.
In this environment, lower fuel costs should really increase stock pricing in Japan from the direct effects, and lower the yen through the indirect effect, thus also powering the Japanese stock market, as exporters will see a bigger yen gain on every US dollar of margin they produce.
This helps explain why you can have a low or decreasing growth of CPI (especially after adjusting for consumption tax hikes) but the impact on consumer spending and retail sales being lower than expected. In an ideal world, a commodity-price led inflation dampening should be a good thing, even if prices are teetering on deflation as commodity prices probably are not structural in the same sense. This is one of my ideas for why the US can run a trade deficit and is stable when the dollar gains value: the decrease in costs of imported goods frees up spending towards domestic sales, savings and investments, which means that a stronger dollar provides long-term gains on the whole for the country.
One might argue that shale gas provides a permanent lowering of oil prices, but since inflation is the derivative of price, finding a new equilibrium in the oil market and oscillating around that means that the commodity contribution to deflation is only valid until a new equilibrium is found and demand starts driving commodity prices upwards again. Hopefully consumers will be in the know when it comes to this, and inflation expectations picking up in the future would hopefully mean bargain hunting among consumers. YoY increases in consumer spending seems to support this thesis, but after tax increases that turns into a roughly 1.5% decline, and thus shows that the consumer is buying less goods.
The main insight: Japan is hiring! There was a decrease in the unemployment rate and the J/A Ratio went up by 1%. As the labour force participation rate is on a general uptrend in Japan, more people are working and looking for (an increasing number of) jobs, and the unemployment is down which means that there are significant hiring needs. It looks like companies are hiring and with these levels of unemployment there will probably be rather large frictions in the job market, which should force salary increases in excess of inflation. If this coincides in the next few months with a bottoming-out of the oil market, then there could be really interesting inflation prospects that would force companies and consumers to run down cash hoardings and escalate the velocity of money in Japan.
One of the interesting things is the increase in monthly household spending, but decrease in monthly retail sales! What? One way to reconcile this could be if households are spending on non-retail things like travel / transport / communication, education, housing, or health care, where most of these would be good things to spend money on in the long term.
Housing increases could be greatly beneficial for showing a housing market revival, and expenditures here (except for utilities) are likely to come back into the economy with a much greater multiplier. Same with education, and with a potential Abenomics focus on health care then growth here is a mild positive with some risks thrown in. If people are traveling more internally in Japan it probably means a better functioning of the economy and spread of opportunities. Since this is data for October and the USD/JPY rate was relatively flat versus the September average, I don’t think Japanese travelers are paying out of their noses when they get abroad to a significant enough degree to force this beat of expectations.
Is the Japanese manufacturing business cycle turning?
The Japanese manufacturing- and industrial production business for the last 15-years have completed roughly 7 cycles of growth and decline. If we are bottoming out here as the data might indicate, then that is a strong gain and a great benefit to Japan and Abenomics from having a short-and-shallow business cycle. as inventories probably need to be bulked up as well in these conditions, forcing added production throughout the supply chain. The expectation for lower industrial output looks set to be beat with November data I would expect, given the overall increases in inventory and better outlooks due to my lowered tax expectation and probably better international growth than the Japanese managers had expected, further fueled by lower crude oil prices.
Increasing construction and housing starts that might be bottoming out would tend to lend (very statistically insignificant) support to the bottoming of the business cycle and they should be overall positives to the economy as they perform better than expected.
How did the markets react then?
There seems to have been a perfect storm of good data, good technical market positioning and good commodity market moves to pump some rocket fuel into the USD/JPY pair and Japanese indices overall. The USD/JPY was up 0.73%, with a Nikkei 225 addition of 1.23% matched to the basis point by the JPX Nikkei Index 400, and a TOPIX sprint of 1.32%.
A large part of this came with the first batch of data, between 08:30 and 08:50 local time. This made the USD/JPY cross its 48- and 120-hour EMAs, turned the MACD-EMA spread to shrinking and forced a cross in the ADX/DMI. We also got a cross above the Fibonacci level on that chart. Even better? It all happened in one 4-hour candle. We got a new daily closing high on the US-closing basis, and higher than all but one recent Japanese market close (Thursday November 20th). The data release reactions were vastly weighed towards the morning batch, but a little yen drop on the construction and housing data as well. Foreign markets largely took the reigns after the Japanese markets closed, with a broad US dollar strengthening run across the board (euro, commodities, yen, you name it) pushing the yen to a low of 118.76 against the dollar, but closing at 118.6.
The Nikkei repeated the same patterns sans Fibs, but was much more one-sided in the trading over the day, after having a later cross or overturn of its technical indicators (having to wait for the next 4-hour candle since it started from a lower level). The futures daily close was not as strong (with Nov. 14, 16, 17 and 24 closings higher in US markets) but only the November 14th close being higher on the spot market. Being above the initial spike from the BOJ/GPIF announcement double is still a great feature, especially as US futures were down and should have contributed to much more weakening on the futures market than what was seen.
Japan looks set to be ready for an interesting December month!