Fundamental Analysis – Explaining the Japanese Economic Data

So far, we’ve addressed the Australian and Canadian economies as two special economies; on the one hand, because the Australian economy is dependent on gold and other commodities, and on the other hand because the Canadian economy is dependent on oil. This dependency is strongly reflected in their currency fluctuations. However, if these two economies still have 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 founded on values not to be found anywhere else in the world. Japan has one of the strongest working cultures in the world, if not the strongest. Also, their long-standing employment habits, such as the life employment principle that comes from the Keiretsu corporations, is still very much alive. While all of 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 has managed to isolate itself from the rest of the world, and in the end has become 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 ageing population and the inability to integrate other cultures makes Japan a closed economy, and now it is faced with huge demographic problems. The more time passes and things do not change, the more difficult it 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 USD/JPY pair is the second most important and liquid currency pair on the dashboard after the EUR/USD. 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 has recently been associated with having haven status. The Swiss franc is in the same category, but that is another story. In short, in a flight to safety or a haven case, the currencies perceived as offering this status are being bought.

BOJ Press Conference

The central bank is the Bank of Japan (BOJ), and lately it has become the most famous central bank in the world. This is because of the measures it has taken in the last few years. Remember a bit earlier in this article when demographics were mentioned as a big part of Japan’s economic problems? The Bank of Japan did everything to address these challenges. Desperate times lead to desperate measures, and the 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 did it engage in a quantitative easing programme (the programme still runs to this day, and even more aggressively than was intended in the first place) but, if one compares it with the one that ran in the United States, the differences are staggering. With its economy a third of the size of the US, the programme in Japan was twice the size of the US one. Imagine the dynamics of the economy! This has been seen on the currency market as well, as the USD/JPY pair jumped from the 70 to over 120 in a relatively short period. The 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 for its beginning. The event is the way in which the Bank of Japan communicates its monetary policy stance and interest rate, and it is subject to extreme volatility. Not only is the JPY affected, but other currency pairs as well.
japanese economic data -1

CPI – Inflation

Inflation is the reason why the Bank of Japan is doing what it is doing these days; or to be more exact, the lack of it. Japan has had almost two decades of deflationary pressures, with a deflationary spiral that has had negative effects on the economy. Thus, there is little or no economic growth, and things are in a vicious circle. Deflation happens when people are not spending 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 the population gets, the less they spend. Deflation therefore came as no surprise, and to fight it, the Bank of Japan went to extremes. It is now the main owner of the Japanese stock exchange, with over 30% and rising, and in a few years from now, there will be no more Japanese Government Bonds (JGBs) 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 diffusion index based on a survey of large manufacturers. You guessed it – it is a sort of Purchasing Managers’ Index (PMI). However, it is a bit different for the following reasons:

The image below shows the December 2016 data coming in at 10, which is a healthy place 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, everything that matters is related to the actions and measures the Bank of Japan takes. This is subject to extreme volatility, and for Forex traders this is all that matters. Of course, as in any economy, data such as Gross Domestic Product (GDP), Retail Sales and the like are intended to let traders form an idea about the shape of the economy. But, in the end, what really matters is what the Bank of Japan is going to do next.

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