US and Europe in Focus, but Don't Forget about Japan

With the ECB meeting, Greek vote, signs that the German locomotive is moving in reverse, and the continuing wait-on-Rajoy, Europe is rightly in the cross hairs.  

The US election also does not do much to push the world's biggest economy out off center stage as the fiscal cliff is looming and the key actors have not changed.  The seeming willingness to embrace revenue increases by the Republican leadership needs to be understood in the broader context of tax reform rather than a particular position on the tax breaks soon to expire. 

Nevertheless, news from Japan is important and ought not be overshadowed. For the first time since 1981, Japan reported a current account deficit on a seasonally adjusted basis.

The Sept shortfall was about JPY142 bln.  It reflected a drop in exports, especially to China, with which there is a territorial dispute that has spilled over into business linkages.  There was a rise in imports as well, some of which may be related to the new Apple Iphone.  The investment income balance was stable.                                          

While the one-off, or short-term factors played a role, there is a sense that long-term forces are beginning to show themselves earlier than had been anticipated.  Japan relies on its external surplus to finance its budget deficit and debt.  Japan's ability to finance its own debt is surely waning, with shrinking population, falling savings rate and low rates of return, even the seasonally adjusted current account deficit is a bit of a fluke. 

On an unadjusted basis, Japan's current account surplus in September fell 70% to its smallest Sept surplus since 1985 and about a third smaller than the Dow Jones and Nikkei survey anticipated.  

                                             

Included in the data release was a summary of Japanese investors purchases of foreign bonds.  Japanese investors bought the most US Treasuries in a year in September (JPY1.26 trillion or ~$15.8 bln).  Japanese investors also bought most Germany bunds since 2010 (~JPY881.5 bln).  A smaller external surplus will, over, time, likely curb Japan's demand for foreign assets.                  

 Separately, the MOF reported that China sold JPY135 bln of Japanese bills and JPY19.7 bln of medium and longer-term Japanese bonds.  Although it might be tempting to think the divestment is related to the territorial dispute, the figures are too small to be a signal given the normal monthly fluctuations. 

      

Japan also reported a much larger than expected drop in core machinery orders.  The 4.3% drop in the month of September was more than twice the decline the consensus forecast.  The soft domestic and foreign demand undercuts the need to build capacity and undermines capex.                                  

Japan reports Q3 GDP first thing Monday morning (Nov 11) in Tokyo.  A 0.9% contraction on the quarter is expected, which would be the worst since the tragedy in Q1 11.  On an annualized basis, it translates into a 3.4% decline in output.  The report will steal some of the thunder from the Sept industrial output figures due the next day.

Meanwhile, local reports suggest that Japan's own fiscal cliff is likely to be averted.  The opposition LDP appears to have capitulated under pressure and will cease their efforts to use the power of the purse to block the issuance of bonds.  A bill is likely to be approved by the end of next week and the threat of the Japanese government running out of money by the end of the month will be averted.  

The LDP were trying to force the Noda government to set a date certain for the election, which was seemingly promised in exchange for the LDP's support for the controversial retail sales tax increase.  There is an opt-out for the implementation of the tax and is related to the strength of the economy in 2014.  It is too early to make much of this, but it is something to bear in mind.

The dollar violated the 3-week uptrend line against the yen yesterday but managed to close back above it, but now it is back below it (~JPY79.95).  There is a bearish divergence unfolding in the 14-day relative strength index.  However, it requires a break of JPY79.65 and ideally JPY79.50 to give confidence a dollar top may be in place.