Fundamental Analysis – Explaining the Japanese Economic Data

So far, we’ve addressed the Australian and Canadian economies as two special economies. On one hand, because the Australian economy is depending on gold and other commodities, and on the other hand because the Canadian economy is dependent on oil. This dependency is strongly seen in their currency fluctuation. However, if these two economies are still having other ways to levy their dependency on commodity prices, the Japanese economy seems locked in a strange place. It is difficult to find the right starting point to describe the Japanese economy. It is the third largest economy in the world, following the United States and China, and it is based on values not to be found anywhere else in the world. Japan has one of the strongest, if not the strongest, working culture in the world. Also, their long-ago employment habits, like life employment principle that comes from the Keiretsu corporations, is still very much alive. While all these may represent a strength for any other economy, in fact, for Japan, they are a weakness. Because of its culture and because it was unable to integrate other cultures, the Japanese economy is in a terrible situation: it managed to isolate itself from the rest of the word and, in the end, it is a bubble that will burst at some point in time. Don’t get me wrong, there are great things going on in the Japanese economy. Just look around you and it is impossible not to see a Toyota car or any other product that comes from Japan. But its aging population and the inability to integrate other cultures makes Japan a closed economy and now it is facing with huge demographic problems. The more time passes and things are not changing, the more difficult will be for the economy to cope with the new reality.

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What Data Matters for the Japanese Economy?

The Japanese currency is the Yen (JPY) and it is a special one for the Forex dashboard. The USDJPY pair is the second most important and liquid currency pair on the dashboard, following the EURUSD. Its strong relation and correlation with the equity markets across the board and especially in the United States are widely known. The Yen is a volatile currency and recently is associated with a haven one. The Swiss Franc is in the same category, but this is another story. In short, in a flight to safety, or a haven case, the currencies perceived of offering this status are being bought.

BOJ Press Conference

The central bank is Bank of Japan (BOJ) and lately, it is the most famous central bank in the world. This is because the measures took in the last years. Remember a bit earlier in this article when the demographics were mentioned as a big part of the Japanese economic problems? Bank of Japan did nothing but to address these challenges. Desperate times lead to desperate measures. Bank of Japan did the unthinkable and was the first central bank in the world to go into unprecedented territory with its monetary policy. Not only that it was engaged in a quantitative easing program (the program still runs to this day, even more, aggressive as it was intended in the first place) but, if one compares it with the one that ran in the United States, the differences are staggering. On three times, smaller economy size, the program in Japan was two times the size of the one in the U.S. Imagine the dynamics of the economy. This has been seen on the currency market as well, as the USDJPY pair jumped from the 70 are to over 120 in a relatively short period. Bank of Japan Press Conference is the main event to watch from Japan. It is scheduled eight times per year and there is no exact time as for its beginning. The event is the way Bank of Japan is communicating its monetary policy stance and interest rate, and it is subject to extreme volatility. Not only the JPY is affected, but also other currency pairs.
japanese economic data -1

CPI – Inflation

Inflation is the reason why Bank of Japan is doing what it is doing these days. To be more exact, lack of it. Japan fights almost two decades of deflationary pressures, with a deflationary spiral that has negative effects on the economy. Thus, there is little or no economic growth, and things are in a vicious circle. Deflation is happening when people is not spending the money. The more money is saved and products are not being sold, the worse an economy is doing. This leads us back to the demographic problem. As a rule of thumb, the older people gets, the less they are spending.
Hence, deflation is not a surprise. To fight it, Bank of Japan went to extremes.It is now the main owner of the Japanese stock exchange, with over thirty percent and rising, and in a few years from now, there will be no more JGB’s (Japanese Government Bonds) to be bought. Time is running out and inflation is not picking up. The release to watch is called the Core CPI and it is like any other core inflation data from around the world.

Tankan Manufacturing Index

The Tankan is a level of a diffusion index based on surveyed large manufacturers. You guessed it, it is a sort of PMI (Purchasing Managers Index). However, it is a bit different, in the sense that:
– It is released quarterly, and not monthly like in the rest of the capitalistic world. This makes it more important than the monthly PMI’s released around the world for the simple reason that it is considering a bigger period.
– It is calculated and interpreted based on the zero level, and not the 50 level like in the case of the regular PMI’s. Therefore, the bigger the value above zero, the better for the manufacturing sector is.
The image below shows the December 2016 data coming at 10, which is a healthy pace for the manufacturing sector. The new data is to be released around the end of the current quarter.
japanese economic data -2

Other Important Events

When it comes to Japan, all it matters is related to the actions and measures Bank of Japan is taking. This is subject to extreme volatility and for Forex traders this is all that matters. Of course, like in any economy, data like GDP (Gross Domestic Product), Retail Sales and all, are intended to let traders form an idea about the shape of the economy. But, in the end, what matters is what Bank of Japan will do next.


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