Asian shares tilt lower and European equities are mixed, while U.S. stock futures are flat-to-higher.
Japan's Nikkei sank 2.35% on the first day of trading of 2014, although that was off the back of a nine-day winning streak prior to the New Year break. "A consolidation move of some kind was in order for stocks after that long nine-day run up," says asset manager Yoshihiro Okumura. "The magnitude of the fall is understandable considering the dollar's weakness."
The Shanghai composite dropped 1.8%, pulled lower by slowing services growth, the re-opening of the IPO market and concern about how government reform might affect GDP.
In Europe, Spanish shares climbed 0.7% following strong PMI data. Elsewhere, London is -0.2%, Paris flat, Frankfurt -0.1%, Milan +0.7% and the the EU Stoxx 50 is +0.1%.
U.S. stock futures: Dow +0.1%. S&P +0.1%. Nasdaq +0.1%
Japan's Nikkei 225 has closed the day and the year at a fresh six-year high of 16291, representing a rise of 0.7% for the session and 57% for the year. That makes 2013 the index's best annual performance since it jumped 92% in 1972.
Japanese stocks have been benefiting from the central bank's massive money printing, which has helped weaken the yen and boost exporters. The USD-JPY is +0.1% at ¥105.29 after the yen earlier hit a five year low of ¥105.41.
Elsewhere in Asia, Hong Kong ended flat and China -0.2%, while India is -0.2%.
Barring a big move higher in the next couple of sessions, the yen (FXY -0.2%) appears set to end 2013 pretty close to the year's low, the dollar buying more than ¥104 this morning vs. less than ¥80 in November 2012.
"We do not believe that the current pace of yen depreciation is sustainable," says JPMorgan's Junya Tanasa, expecting an unwind of the popular Nikkei long/yen short trade at some point in 2014.
For a contrary view, check out Kyle Bass, who contends the real move lower in the yen hasn't even begun yet. He's calling for dollar/yen rising all the way to ¥200 and - as we've all seen - once currencies get a head of steam going in a certain direction, no one can be sure of where the move will stop. ¥350? Why not?
"Core core" CPI, which excludes fresh food and energy, accelerated to +0.6% on year in November from +0.3% in October. The gain in November was the largest increase since August 1998 and marked the second consecutive month of growth.
Overall CPI sped up to +1.5% from +1.1%.
Crucially for Japan's fight against deflation, total cash wages rose for the first time in five months with an increase of 0.5% on year. Regular pay was flat, the first time the metric hadn't dropped in 1 1/2 years.
However, may economists expect Japan's inflation to soon peak once the impact of the yen's weakness wears off.
Overall household spending rose 0.2% vs +0.9% in October and consensus of +1.7%.
Unemployment held steady at 4% but was just above forecasts of 3.9%.
The Nikkei ended with very slight gains, while the USD-JPY is flat at ¥104.82.(Previously)
Japan's Nikkei 225 has climbed 1% to another six year high of 16,174 as the yen has weakened and touched a five-year low. The USD-JPY is +0.4% at ¥104.77 after earlier hitting ¥104.84, the weakest yen level since October 2008. Another factor boosting stocks is the start of tax-free investment accounts, which has sparked buying from retail investors.
Chinese shares dropped 1.6% even though money market rates continued to ease, with the seven-day repo falling to 5.33% in late trading from 5.58% yesterday. Elsewhere in Asia, India's Sensex is +0.2%.
Turkey's ISE 100 is -1.1% following a drop of 4.2% yesterday as the scandal-induced political turmoil continues.
The Bank of Japan could face a problem if it wants to expand its already massive monetary stimulus: a shortage of new bonds to buy. Even at the current rate of purchases, the policy could hit trouble after over two years.
As a result, says former BOJ board member Atushi Mizuno, the bank may hold off from loosening policy further until late next year, which would give it time to assess the impact of a hike in sales tax in April as well.
The BOJ could also stop buying Japanese government bonds every month and instead only do so when long-term rates rise above a certain level.
“It is necessary to break the rules of game that prevailed in the deflation equilibrium,'” BOJ governor Haruhiko Kuroda said Wednesday, in his year-end speech.
Kuroda — who sees the CPI remaining slightly above 1% in H1 2014 — says Japan must avoid the self-perpetuating deflationary spiral that can occur if companies and individuals stop spending money in anticipation of lower prices in the future.
Separately, Prime Minister Shinzo Abe indicated that he is determined to prevent a planned sales tax hike from jeopardizing Japan's economic recovery.
Japan's government has adopted a record ¥95.88T ($921B) budget for the fiscal year starting in April, which will include increased spending on social security, defense and public works.
However, the government is also trying to limit further growth of its massive debt, and it will reduce the issuance of new revenue bonds to ¥41.25T from ¥42.9T this year.
Economist Yoshimasa Maruyama is not convinced. "The government needs to show that it’s moving in the right direction on fiscal discipline but this budget lacks punch," Maruyama says. "The government must cut spending to reach the planned target of a surplus in 2020."
The budget also forecasts that real GDP will grow 1.4% and nominal GDP 3.3%.
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 expects the annual rate of core CPI to rise "for the time being" and maintained its view that the economy will continue recovering moderately. However, the bank believes that demand will increase before a rise in sales tax in April and then fall after the hike is implemented.
The Nikkei is +0.1% following a sharp rise yesterday and ahead of a three-day weekend, while the yen has fallen against the dollar, with the USD-JPY +0.2% to ¥104.43. (BOJ Statement)
The sentiment index for small non-manufacturers turned positive for the first time in 21 years with an increase to 4, while the reading for small manufacturers was 1, the first positive number for six years.
However, large Japanese companies have scaled back their capex projections, expecting to increase FY 2014 spending by 4.6% vs a forecast of 5.1% three months ago.
"We still don’t find any evidence that corporates are really starting to get confident about the sustainability of the recovery and actually ramping up domestic investment," says HSBC economist Izumi Devalier. "And that remains a worry in an environment where consumption is going to weaken next year."
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