After a busy week of economic data for Japan, the Cabinet Office will release the gross domestic product data for the third quarter next Monday. Last week data painted a softer picture of the Japanese economy, suggesting that the country is struggling to move onto a pathway of growth and positive inflation. In short, machine tool orders contracted further in October, by 23.1%y/y from a previous drop of 19.1% y/y in September, while machine orders (a proxy for private capital expenditures) continue to recover from April’s tax hike.
The gauge rose 7.5%m/m in September, beating median forecast of 3.1% and previous month contraction of 5.7%m/m. Separately, PPI surprised to the downside in October by contracting -3.8%m/m versus -3.5% consensus but improving slightly from previous figure of -4%. Finally, industrial production expanded 1.1%m/m in September, improving marginally from the first estimate of 1%. All in all, Japan is struggling to convince investors that its economy is wealthy and that it remains a good investment on the medium to longterm – GDP is expected to shrink further in the third quarter by 0.1%q/q after a contraction of 0.3%y/y in the June quarter.
Until now, the yen has been able to hold ground against most currencies, thanks to Governor Kuroda who is providing continuous support to the Japanese currency through overly optimistic comments. However, we believe that this situation cannot last much longer and the BoJ will have to increase the size of its quantitative and qualitative easing programs in the coming months.
The central bank has already revised its inflation forecast, postponing its 2% inflation target date by six months – to between October 2016 and March 2017. From our standpoint, it is just a matter of time before the Japanese yen starts weakening again, especially against the US dollar, as the monetary policy divergence will accentuate the yen’s debasement. Everybody is waiting on the Fed, the BoJ is no exception.