Current Account Total (SEP) Domestic CGPI (YoY) (OCT) (03:50GMT; 18:50EST)
Actual: ¥2024.9B Actual: 2.8%
Expected: ¥2018.2B Expected: 3.3%
Previous: ¥1476.9B Previous: 3.5% (R)
How Did the Markets React?
Market reactions in Japan were extremely mixed when a surging Japanese current account surplus and a softening of corporate goods price index hit the tape. Export growth of 14.8% from last year helped push the current account wider then expected, as a weaker yen made Japanese products cheaper and more attractive. The jump in exports may lead European finance heads to be more aggressive in campaigning for the yen to appreciate at the G20 meeting of finance ministers and central bankers in Australia later this week. The Japanese, however, will be reluctant to take on measures like monetary policy tightening as inflation remains close to non-existent. This was highlighted today by the release of domestic CGPI, which slowed to an annualized 2.8% in October from a downwardly revised 3.5% the month prior. The decline was led by easing oil costs, and while these prices are likely to rebound in coming months, the report signals that deflationary risks are mounting. As a result, the balance of the simultaneously released reports eventually left prices in the fixed income, FX, and equity markets relatively unchanged.
Bonds Japanese 10-Year Government Bonds
Japanese fixed income markets opted to ignore the strong current account surplus and instead focused on the disappointing domestic CGPI. The index of prices that businesses pay for energy and raw materials slowed to 2.8% from a year earlier, after rising at the fastest pace in 25 years in September. The data highlights the issues the Bank of Japan has been facing in their efforts to tighten monetary policy following the decision to end ZIRP in July with a 25bp hike to 0.25%. With inflation still extremely low and GDP expected to hold at a tepid 1.0% upon release tomorrow, the BOJ has little leeway to pursue a normalization of rates, which traders priced into 10-year JGBs during the Asian session. Yields fell to a session low of 1.660% after opening at 1.685%, which is in line with the steady declines from 2.000% three weeks ago amidst falling global growth prospects.
FX USD/JPY
The FX market reaction to Japanese data was two-pronged today, as yen initially strengthened in response to a widening of the current account surplus. USD/JPY fell to a one week low of 117.12 as export growth of 14.8% from last year helped push the current account wider then expected, as a weaker yen made Japanese products cheaper and more attractive. Traders responded correctly by anticipating that the acceleration in exports may lead European finance heads to be more aggressive in campaigning for the yen to appreciate at the G20 meeting of finance ministers and central bankers in Australia later this week. However, the reality of the situation led the pair to rise to 117.40 as domestic CGPI, which was released at the same time as the current account, slowed to 2.8% from a year earlier after hitting a 25-year high in September. With inflation still extremely low, tightening monetary policy becomes less of a feasible option for the Bank of Japan, especially as GDP is estimated to hold at a dismal 1.0% when it hits the tape tomorrow.
Equities Nikkei 225 Index
Japanese equity markets closed out the day slightly weaker with the benchmark index, the Nikkei 225, down 1.0% to 15,948.20. The Nikkeis decline marked the first time in six weeks that the average fell below the 16,000-level. Traders were not paying attention to todays economic reports, however, as they opted to focus on estimated for tomorrows Japanese GDP figures. Third quarter growth is expected to hold at an annualized 1.0%, the slowest rate since 2004. Tepid expansion is likely a result of stagnant household consumption and declining business spending, which may no longer be balanced by booming exports, as sales of Japanese products are anticipated to slow. Shares of companies largely dependent on domestic demand were lower, with SMFG, one of Japans leading banks, down 1.7% to 1.18 million yen. Shares of Fast Retailing, the countrys leading clothing retailer, were down 2.5% to 9,970 yen while Fanuc, a maker of machinery products, slipped 1.6% to 10,280 yen.
