The Week In Hindsight, 07 July 2014

Last week saw Japanese economic data continue to point toward a brightening horizon for the world’s third largest economy as average cash earnings came in as expected, while the Tankan Non Manufacturing index also pointed toward an uptick in economic activity.

While overall Q2 manufacturing activity was muted, according to the Tankan manufacturing index, the Markit Final manufacturing PMI for the month of June indicated an improvement in conditions at the close of the quarter when the benchmark survey reading rose to 51.5 from 51.1 during May.

In addition to the positive economic data, the BOJ released its quarterly assessment for Q2 economic performance during the week.

It was here where policy makers across regions stated that although activity had declined in the weeks immediately following the consumption tax hike, all regional economies were on track to undergo at least a moderate rebound during Q3.

In Osaka, Japan’s largest region, policy makers expect percentage increases in capital investment among businesses to be in the double digits while concerns over potential labour shortages are also beginning to emerge across some regions following the rapid decline, to a 16 year low, in national unemployment.

All in all, the Japanese recovery remains on track despite weeks of elevated concerns during the close of Q1 and the opening of Q2. Japanese equities have continued to respond positively to these developments, with the NIKKEI 225 reaching its highest level since January during the previous week.

Going forward, we continue to expect a recovering global economy to underpin sentiment and earnings growth in corporate Japan. Despite this, we believe a lower starting base provides scope for greater earnings momentum at more inward looking  firms as opposed to those with an outward facing horizon, as both consumer and business confidence continues to rebound throughout H2.

This would be likely to prove positive for the broader market, as under this scenario the link between currency strength and the performance of JPY indices should weaken. Effectively, even as the Yen strengthens in response to receding expectations for further stimulus from the BOJ, equity indices will still be in with a shot at outperformance if growing internal confidence and activity is able to further the earnings effect of a recovery in developed markets.   

NIKKEI 225 at 10 Minute Intervals

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NIKKEI 225 at 8 Hourly Intervals

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