Will The Japanese Numbers Weigh On The Yen?

Includes: FXY, UDN, UUP
by: Ralph Shell


The market is expecting good first quarter economic numbers, but can they be sustained?

Japan depends on exports and China receives up to 25% of the total. What will the demand be if their economy slows?

What will the yield be on Japanese Government Bonds if the inflation rate goes to 2%?

Data will be released today which is expected to show the success of PM Abe's economic stimulants. The Q/Q GDP is forecast to be 1% higher versus 0.2 last period. For the entire year, the Annualized GDP gain is a hefty 4.2% gain versus 0.7% in the prior year.

There is, however, a problem with these numbers. Remember the 1st of April was the day when the consumer tax was raised from 5 to 8%. Quite naturally consumers behaved in a rational fashion and went on a shopping spree in Q1 of 2014. Some even estimate this frantic demand ahead of the tax increase, caused the thrifty Japanese to tap into their savings. But the hike in the tax rate is a onetime event for this year. Extrapolating this boost in consumer spending to be a quarterly event will not work.

There is another threat to the Japanese recovery. In theory the weakened yen was supposed to stimulate the economy, but there is a threat exports are falling short of expectations. Earlier this week Reuters had some interesting comments:

Weak Japan exports, not tax hike, could shake BOJ.....

The Bank of Japan is increasingly confident that the economy is weathering a recent tax increase and on its way out of deflation, but another threat to that optimistic scenario is lurking - weak exports.

If shipments abroad continue to fall short of the central bank's forecasts, the recovery in the world's third-biggest economy could stall and the BOJ might be forced to ease policy again in the coming months.

...."The BOJ's main scenario is for exports to gradually pick up. But it's true that exports remain the biggest risk to the outlook," said an official familiar with the BOJ's thinking.

Bank of Japan Governor Kuroda is scheduled to speak tomorrow. Should the number fall short of expectations some think resumption of their QE could restart as soon as July. His comments will be interesting.

Often the economic success of exporting nations is beyond their control and dependent on the economic well being of their trading partners. Almost 25% of Japan's exports move to China, and a Telegraph article today suggested there is trouble ahead:

China's authorities are becoming increasingly nervous as the country's property market flirts with full-blown bust, threatening to set off a sharp economic slowdown and a worrying erosion of tax revenues.

New housing starts fell by 15pc in April from a year earlier, with effects rippling through the steel and cement industries. The growth of industrial production slipped yet again to 8.7pc and has been almost flat in recent months. Land sales fell by 20pc, eating into government income. The Chinese state depends on land sales and property taxes to fund 39pc of total revenues. .......

The authorities are now in an analogous position to Western central banks following years of stimulus: reliant on an asset boom to keep growth going. Each attempt to rein in China's $25 trillion credit bubble seems to trigger wider tremors, and soon has to be reversed.

If indeed $25 Trillion of credit has been pumped into the system, Japan, as well as many others will be negatively affected by the hissing sound as the bubble breaks.

For yen traders 2014 has been quite cruel. Against the USD in early January 2014, 105.40 yen were needed to buy a greenback, the most since September of 2008. In retrospect it appears the spec selling is what took the yen down since our COT report shows they were short a massive 175K contracts then. Specs remain bearish but the last report has the position down to 84.6K contracts.

Longer term the Japanese may find replacing deflation with 2% inflation will not work well. Currently ten-year Japanese Government Bonds yield about .60% a year, the lowest yielding bonds in the world. At this level the BOJ is probably the only buyer, and prior buyers are now shopping for higher yield overseas. Capital flight from Japan will follow, another factor, which will weaken the yen.

For the past six weeks the USDJPY has been trading sideways between 104.20 and 101.40. The yen bears were disappointed when the BOJ failed to expand their stimulus. Currently we are trading closer to the bottom of the range. Should the forthcoming numbers fall short of expectations we are inclined to be sellers of the yen buying either the USDJPY (FXY, UUP, UDN) or the EURJPY. There may still be a large number of shorts in this market, but there remain many potential threats to the Japanese economy and their currency.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.