The Week In Hindsight, 04 August 2014

The NIKKEI fell last week as concerns mounted that the US Federal Reserve could be forced to raise interest rates earlier than was previously expected in response to rising inflationary pressures. The catalyst for downward leg across markets was both Q2 GDP data as well as the Employment Cost Index (ECI) reading.

Wednesday’s GDP number showed the US economy expanding at its fastest pace during Q2 since 2009, while the ECI lodged its highest reading since 2011.  

Closer to home, Japanese income, employment and spending data for consumers dominated the data calendar from a macro perspective last week. Unemployment numbers showed the jobless rate increasing moderately from 3.5% to 3.7%, while other data showed industrial production also took a step backward during June.

On a more positive note the pace of contraction in household spending slowed during June, according to data released last Tuesday morning. This was while income data showed base wages, average cash earnings and bonus payments each increased during the period.

All in all, Japanese pay barometers are beginning to head in the right direction – however, real incomes are still falling given that inflation is now running above 3% (1.25% ex consumption tax increase). This highlights the already large question mark that is hanging over the Japanese recovery.

Although Shinzo Abe’s Three Arrows reform program has been successful in re igniting the fires of  inflation, unemployment has come down, confidence has increased and business investment has also begun to pick; the recovery remains tentative.

Without a meaningful improvement in worker pay over the quarters ahead, the risk is that Japanese consumers retrench further and refrain from spending, which has a knock on effect upon economic output.

Consequently, we continue to see it as likely that the BOJ will be forced to extend (add to) its stimulus program later this year (October – December). While this indicates a longer road to full recovery than previously anticipated, the implications for JPY equities are positive as any further stimulus will be likely lead to renewed yen weakness and further aggressive buying of local shares.  





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