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The Nikkei is ahead 2.2% following Tokyo's winning bid for the 2020 Summer Olympics. The news however, will likely boost PM Shinzo Abe's popularity along with the chance of his sales tax increase being implemented next April.
The government also raised its estimate of Q2 GDP growth to +3.8% from +2.6% previously. Consensus forecasts called for a 3.9% increase.
The yen slips half of a percent, with the dollar now buying ¥99.64.
Japan final Q2 GDP: +3.8% versus +3.7% expected and +2.6% preliminary.
As tipped by JPMorgan and UBS last week, the improved GDP number was fueled by a more upbeat read on capital expenditures, which were revised up to +1.3% for the period from an initial reading of -0.1%.
For the first time since May of 2012, Japan's Cabinet Office says its coincident index is "improving", which indicates the government sees "a high likelihood of an economic expansion" based on the composite of 11 key economic indicators.
"The indicators that most contributed to the rise were manufacturing-related numbers, such as industrial output and industrial electricity usage," WSJ notes.
Japan overnight had its biggest gain in a month, the Nikkei +3% to add to Monday's 1.4% advance. The yen has fallen sharply over the past few sessions, with the dollar buying ¥99.29 this morning vs. just ¥97 towards the end of last week. The weaker yen helped Toyota (TM +2.9% premarket) to be the Nikkei's biggest gainer. Kansai Electric soared 8.1% after an expert panel concluded an earthquake fault under the company's Ohi nuclear plant may not be active.
Corporate current profits +24%, corporate sales -0.5%.
JPMorgan and UBS say Q2 GDP may be revised up from a preliminary reading of +2.6% following the capex data, which could make the government more inclined to go through with proposed increases in sales tax. A decision is expected early next month.
Japan's Ministry of Finance reportedly wants to allocate a record ¥25.3T ($257B) just to service the country's mammoth debt of ¥1,000T ($10T) - which is double the size of its economy - for the next fiscal year.
The expected provision is 13.7% higher than for this FY, indicating how the ministry wants to guard against a possible rise in long-term interest rates.
The speculation comes as Japan debates whether to increase sales tax, a move seen as important for dealing with the country's debt but also as possibly hurting its nascent growth.
The 12.2% rise in exports was the fastest since December 2010, with the weak yen helping to boost sales of cars and electronics. Sales to the U.S. +18.4%, to China +9.5%, to the EU +16.6%.
"The details are encouraging because you can see that exports to Japan's main markets are bouncing back," says economist Hiroaki Muto.
The 19.6% jump in imports was the largest gain in three years, due to the weak yen and increasing oil prices.
The trade deficit of ¥1.02T was the third-largest ever. "This is a pretty big deficit and a negative for Japanese companies that will suffer from rising costs," says Yoshiki Shinke of Dai-ichi Life Research.
Reducing Japan's corporate tax rate wouldn't have an immediate impact on the economy, Finance Minister Taro Aso says, as only around 30% of firms pay such taxes.
Rather, the government should consider tax breaks to promote capex and business investment. Economics Minister Akira Amari echoed those remarks.
In addition, Chief Cabinet Secretary Yoshihide Suga denied that Prime Minister Shinzo Abe has told ministers to consider reducing the corporate tax rate.
There has speculation that the government is considering the cut in order to offset a planned two-step rise in sales tax amid fears that such an increase would harm the economy as it begins to recover from deflation.
The Nikkei falls 2.1% while the dollar drops 0.2% vs the yen following the remarks. A lack of clarity about when the Fed might start tapering is also hurting the dollar.
The idea to cut the corporate tax comes as the government increasingly looks to be moving forward with a big hike in the national sales tax - a momentum-killer for the Japanese economy on more than one occasion throughout these two lost decades. A note from JPMorgan this morning has that desk believing the boost will go through as expected, with a final decision coming in October.
The news also boosted stocks, with the Topix climbing 2%. Even after struggling for the last quarter, the Topix is 35% higher on the year. It trades at 1.2x book value compared to 2.5% for the S&P 500 and 1.7% for the Stoxx Europe 600.
Capital expenditure unexpectedly fell for the sixth consecutive quarter, dropping 0.1% on quarter vs consensus of +0.7.
Private consumption +0.8% vs forecasts of +0.5%, boosted by spending on food, travel and consumer electronics.
External demand contributed 0.2 percentage point to growth and domestic demand 0.5 point.
The worse-than-expected GDP has intensified the debate about a proposed increase in sales tax. "There is no need to raise the sales tax in a hurry," says Koichi Hamada, a key adviser to Prime Minister Shinzo Abe. Doing so "as scheduled might hurt the economy."
The yen (FXY) gains 0.7% - dollar yen falling to ¥98.59 - after Japanese inflation rose 0.4% in June, the sharpest rise since June 2008, fueling ideas the BOJ's stimulus "may be working," says Credit Agricole FX chief Yuji Salito. If it is working now, that means less of it in the future, and the Nikkei tumbles 3%. EWJ -1.6%, DXJ -1.8% premarket.
A big rip in dollar/yen sends that pair above ¥100 for the first time since the start of June. The bounce in dollar/yen - which fell as low as ¥94 mid-month - comes alongside a big rebound in the Nikkei, up about 16% from the June low. FXY -0.6%, EWJ +0.9%, DXJ +1.4% premarket.