The Week In Hindsight, 28 July 2014

The NIKKEI rose last week as data emerged early on Friday morning which suggested that inflation had fallen throughout the month of June. While early indications (Tokyo CPI – July) suggest a rebound in this month’s figures is likely, National Core CPI slowed during June. The official reading of the index came in at 3.3%, down from 3.4% the month previously.

Tokyo Core CPI, the earliest indicator of Japanese inflationary trends, suggested at the same time that price pressures increased moderately during the current month, however; it remains to be seen whether this will feed through to July’s National CPI figures when they are released at the end of August.

The deceleration comes just a short time after Haruhiko Kuroda acknowledged that inflationary pressures would be likely to recede over the months ahead, before resuming along an upward trajectory toward the turn of the year.

If this is the case, Kuroda is yet to convince the market as equities have moved sharply higher in the time since the consumption tax increase, while 10 Yr JGB yields have remained close to a fifteen month low; indicating an expectation that the BOJ will be forced to act.  

We noted last week the changing tone of policy makers toward inflation in their most recent review of the economy, as well as our own evolving view of the Japanese policy landscape; which we believe is complemented by the week’s data.

In short, we continue to feel that Japanese policy makers have both the tools and the willpower to overcome

the challenges facing the economy. However, given the recent slowdown in inflation and the fact that wage increases have been too low to stimulate sufficient levels of added demand within the economy, we feel that the BOJ will likely be forced into further easing later in the year to prevent too long a period of slowing inflation and stagnating growth.

Consequently, our outlook for JPY shares remains positive heading into the latter stages of the year. In terms of the immediate future, the focal points for the current week are retail sales numbers, the unemployment rate, household spending figures and industrial production data which are all set to emerge from Japan.

In addition to the local data, US Q2 GDP figures, followed by employment numbers for July, are scheduled for release over Thursday and Friday. With bullish projections in place for both, any divergence (to the downside) from forecasts could see global equity markets recoil from their recent peaks.

On the same note, another solid set of numbers would signal that the long awaited US economic rebound is finally here, which should be positive for equities and general risk sentiment among investors.

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