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Japanese GDP growth slowed to 0.3% on quarter in Q4 from 0.5% in Q3 and missed consensus of 0.7%.
Annualized GDP softened to +1% from +1.1% and undershot forecasts of +2.8%.
The GDP deflator, "which measures the change in prices of final goods and services and is considered as a key indicator for inflationary pressures," fell to -0.4% on year from -0.3%.
Industrial production +0.9% in December vs -0.1% in November and consensus of +1.1%. On year, output +7.1% vs +4.8%.
Capacity utilization +2.2% vs -0.5%.
Japan's Q4 economic performance was kept down by strong import growth, which is a negative factor in GDP calculations, and a limited increase in exports.
Imports +3.5% on quarter, exports +0.4%, business investment +1.3%, consumer spending +0.5%.
The soft growth adds to pressure on Prime Minister Shinzo Abe to detail reforms that will make Japan more competitive. This is especially the case with the upcoming rise in sales tax in April.
"This weak export performance gives us a sense of risk that the Japanese economy may significantly stall after April," says economist Takuji Okubo. "Abe really needs to be quick in showing to the market that he can deliver reform."
The data comes a day before the Bank of Japan is forecast to leave its monetary policy unchanged.
Despite the disappointing GDP, short covering helped the Nikkei end +0.6% following a day of choppy trading.
Japan's core machinery orders, a leading indicator of capital expenditure, plunged 15.7% on month in December, with the fall far greater than expectations for a drop of 4.1%.
On year, orders +6.7% vs consensus of +17.6%.
Moreover, companies have predicted that core orders will drop 2.9% in January-March, which would be the first decline in four quarters.
"Today’s data on machinery cast some doubts on whether the fledgling recovery in business investment will continue," says economist Marcel Thieliant. The government has targeted increased capex as an important element in Japan's battle to end deflation.
However, it's worth noting that the data is volatile and the big drop followed a gain in November.
The USD-JPY is -0.2% at ¥102.46, while the Nikkei is +0.6%.
Not everyone is spooked by the selloff in Japanese equities; with improvement in the economy and rising profits from companies including Panasonic, Toyota, Honda and Hitachi, efforts by Prime Minister Abe to kick-start growth after a long period of deflation are starting to pay off, Japan bulls say.
But currency moves overwhelm everything else and are seldom driven solely by domestic factors; the yen has been pushed up as part of a risk-off move as managers attempted to repatriate their money out of emerging markets.
Japanese basic wages adjusted for inflation dropped to 98.9 on a Labor Ministry index in 2013, matching the level of 2009.
The fall stands in contrast to the government's efforts to encourage companies to increase salaries in order to strengthen the Bank of Japan's battle against deflation.
The data came as business and union leaders started this year's salary negotiations. "Each company will do their utmost to increase wages depending on their earning situation," said Hiromasa Yonekura, the head of Keidanren, Japan's largest business lobby.
The USD-JPY is -0.35% at ¥101.29, while the Nikkei closed +1.2% after falling sharply over the past few sessions.
Dollar/yen is ahead 0.3% to ¥101.26 after plunging below ¥101 yesterday amid the rout in stocks in the West. The dive was felt in the overnight trading session in Japan where the Nikkei plunged 4.2%, bringing its losses to what can be considered a crash-like level of 15% in a month.
Putting the 15% dive in perspective, the Nikkei was last at this level at the start of November. If January's move is a crash, than the move at the end of the year was a blow-off top.
The Nikkei closes -0.6% to round off its worst month since May 2012, with the index dropping 8.5% in January.
Stock markets seem to be still highly troubled by the concept of positive economic news. In the U.S., the economy is trundling along nicely, while in Japan, inflation is heading towards the BOJ's 2% target and unemployment has hit a 16-year low. But it means that the Fed is tapering and the BOJ is less likely to add to its already massive stimulus.
Much of Asia is closed today, due to the start of the Lunar New Year, which will keep Chinese markets shut until February 6.
Japanese core inflation, which excludes food prices, edged up to a fresh five-year high of 1.3% on year in December from +1.2% in November and topped consensus of 1.2%.
Core core CPI, which excludes food and energy, rose to a new 16-year peak of 0.7% vs +0.6% a month earlier.
Overall inflation increased to 1.6% from 1.5%.
While CPI is heading towards the Bank of Japan's target of 2%, the government wants businesses to increase wages in order to solidify the rise in inflation, the test of which will come in Spring wage negotiations. There are also concerns about the impact of an increase in sales tax in April
"Consumers will be hit in the pocket from rising prices and the upcoming sales-tax hike," says JPMorgan's Masamichi Adachi. "The onus is now on companies to convert their profits into wage increases and capital spending."
Workers may be aided in their negotiations by a surplus of jobs: the number of positions for every person looking rose to 1.03, passing one for the first time since October 2007.
The unemployment rate dropped to the lowest number since December 2007, falling to 3.7% in December 2013 from 4% in November and vs forecasts of 3.9%.
Industrial production +1.1% on month vs -0.1% and +1.2%.
Overall household spending +0.7% vs +0.2% and +1.2%.
The Nikkei is -0.6% and the USD-JPY is -0.3% at ¥102.43.
Japan's trade deficit nearly doubled to a new high of ¥11.5T ($113B) in 2013, pulled upwards by the weak yen and increasing energy imports because of a shutdown of the country's nuclear industry.
Japan enjoyed surpluses for three decades until the Fukushima meltdown in 2011.
"It's hard to anticipate when Japan can emerge from trade deficits at this point," says economist Takeshi Minami. High energy costs could discourage companies from having production centers in Japan "and undermine Abenomics.
Short yen (FXY +0.8%) has been as popular a trade as long equities (maybe even more), and it too is reversing in January. Off 0.95% today, dollar/yen is down to ¥102.30 after starting the year above ¥105. Was it the weak Chinese PMI report this week, or the realization that Abenomics - really little more than devaluation - isn't working? Maybe it was just a trade that got too crowded.
The ETF story of 2013 - the Japan Hedged Equity Fund (DXJ -2.2%) - is now off 5.8% YTD, it's taking its sponsor WisdomTree (WETF -7.2%), one of the big individual stock stories of 2013, with it.
Asian shares have mostly fallen as investors have seemed to grow more fearful about the significance of poor Chinese manufacturing PMI data yesterday.
Investors have sought safe havens such as the yen - the USD-JPY is -0.3% at ¥103 - helping to send the Nikkei -1.9%.
"A correction could occur," says investment strategist Shane Oliver. "We have to expect more volatility. Shares are no longer dirt cheap, meaning the easy gains are behind us."
The once place where the PMI data didn't seem to to have an effect today was China, whose Shanghai Composite rose 0.6%. Stocks were partly boosted by money market rates falling again following a $42B+ injection of cash this week from the central bank ahead of the Lunar New Year. The seven-day repo rate dropped 77 bps to 4.61%.
As expected, the Bank of Japan has left its key interest rate at 0.1%, and maintained its program of expanding the monetary base by ¥60-70T a year.
The BOJ noted that the economy has continued to recover moderately and will keep doing so, although it will be affected by a "front-loaded increase and subsequent decline in demand" due to an upcoming rise in sales taxes.
While "inflation expectations appear to be rising on the whole," the BOJ said, CPI is "likely to be around 1.25% for some time." The bank's target is 2%.
The Nikkei is +0.2%, while the USD-JPY is +0.1% to ¥104.45. (BOJ Statement)