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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)
The very crowded short Japanese yen trade continues to unwind (just a bit). Dollar/yen is down 1% to ¥103.13 in morning action. The pair had risen to nearly ¥106 on the year's first trading session. FXY +0.9%.
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?