The Week In Hindsight, 21 July 2014

The NIKKEI traded sideways last week, closing flat with the previous Thursday following a flow of mixed economic data and last minute news that a commercial airliner had been shot down from the skies above Ukraine.

Despite the uninspiring performance from equities and the tragic incident in Ukraine, not all of the news emerging over the course of the week was bad. This was as Tuesday (London) morning saw the BOJ’s monthly report of economic and financial developments released.  

In it, the BOJ Policy Board noted that although public investment and exports have decelerated during the second quarter, business investment has increased in line with growth in corporate earnings and the recovery remains on track, albeit at a modest pace.

In addition to the above, the unemployment has fallen to a sixteen year low while signs have begun to indicate, according to policy makers, that the recent increase in wages within the corporate world has now begun to spread to the SME sector.

In short and much the same as before, policy makers anticipate that the recovery will continue at a moderate pace, while the knock on effects upon activity in certain areas, resulting from the consumption tax increase, are expected to diminish over time.

The most notable adjustment in the BOJ’s position toward the economy has been in relation to inflation, which YoY, is currently at a rate of 1.25% (ex CT Increase). The recent text Monetary Policy report released by the bank omitted its usual expression of confidence that the rate of inflation will converge with the BOJ target ahead of its 2015 deadline.

In place of the usual comment came a statement that inflation would probably remain at 1 ¼ percent for some time. Such an admission from the policy board, in our view, now makes the subject of an additional round of Quantitative Easing from the BOJ less a question of if, and more one of when.

Consequently, we expect recent gains in the NIKKEI to be sustained over the months ahead as the anticipation of further easing builds among investors.

Going forward into the immediate future, the week ahead sees CPI data for the month of June emerging from the Japanese economy, with a moderate decrease from last month’s levels being the official forecast. Moving on from here, US Q2 GDP figures due the following week have the power to set the mood for investors across global equity markets.

While official projections are yet to be released, any failure to meet the bar in terms of investor expectations could see some rethinking their portfolio positioning as well as their 2014 expectations as a whole. Such an outcome would doubtless lead to increased volatility for a period, and could result in temporary losses for the NIKKEI given the reliance of the Japanese economy upon a broader recovery across developed markets.  

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