Will Bank of Japan Offer New Remedies for the Country's Ailing Economy?

Includes: JYN
by: Ralph Shell

It is widely expected that tomorrow will be the day the Bank of Japan will offer some new solutions for Japan's moribund economy. This morning there was more confirmation of economic woes. The month to month report of Core Machinery Orders was a disappointing -3.3%, less than the expected increase of 2.0%, and 2.9% in the previous period. Then Toyota (NYSE:TM) announced an expected 35% drop in earnings because of supply disruptions caused by the March earth quake and tsunami, and the high yen.

In Japan, Toyota produces about 3 million of the expected production of 7.2 million cars made annually. Toyota claims that its break even value of the currency needs to be about 85 yen to the USD, and the current level gives it a loss of 5 yen per USD on export car sales. Consequently it is shifting production outside of Japan.

With the Japanese bank rate already a rock bottom low of .10%, what tools remain for the BOJ to stimulate the economy? There are rumors that the BOJ, tomorrow will announce a plan similar to QE2, whereby it increases the money supply by expanding holdings of debt. Another idea kicking around is, the BOJ will lend money to businesses that do not own real estate. Details of this proposal are sketchy.

The stimulant may perk up the Japanese economy but it also increases sovereign debt. Just two weeks ago Standard & Poor's cut the Japanese sovereign debt rating from AA to -AA. Moody's is now threatening to reduce the Japanese debt rating unless reforms are initiated to reduce the debt level.

This morning it was reported on Japan Economy News and Blog that the IMF released a report warning the Japanese debt will reach 250% of the GDP by 2015. A 5% increase in the consumption tax is recommended but the implementation of such a tax would be political suicide, and a vote on such a tax will not happen before 2013.

Recently Japan's biggest trading partner has become China. Tonight we get reports from China on the current status of the economy. Although the Chinese economy is slowing, it remains unknown if China is going to be able to navigate a soft landing after the recent economic boom. Or is it a bubble? The Chinese have been raising rates, trying to stem inflation. The year-over-year (Y/Y) CPI is expected to come in at plus 5.5%, up from the previous period's 5.3%. There are reports food costs are soaring at a much higher rate than the CPI. Unless the CPI, PPI and other reports show a weakening economy further rate hikes are likely.

Resumption of Japanese economic growth when the economies of China and the US are slowing might prove a daunting task. John Mauldin, the astute market analyst continually says, "the Japanese economy is like a bug looking for a windshield." Will the new stimulus plans be the windshield?

The USDJPY has spent the last ten days flirting with the 80 handle. Trade on Friday was peculiar. With global equity markets in the tank, there seemed to be an absence of traders buying the yen for its supposed safety status. That was a friendly clue. Judge a market, not by the news, but because of how it reacts to the news. Currently we are 15/20 points above the 80 handle. We are inclined to be long here with a stop on a close under 79.50. Note on the 4H chart the MACD is close to turning higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.