Japan: More Output, Less Deflation

Japan has released a number of reports early in the Tokyo session that show an economy seemingly on the mend and an easing of deflationary pressures. Ironically, the yen tended to weaken in response, whereas the dollar ostensibly sold off in North America after disappointing US data (downward revision to Q1 GDP and an rise in weekly jobless claims).

On the real economy side ,industrial output in April rose 1.7%, nearly three times more than the Bloomberg consensus had forecast and comes after a 0.9% rise in March. The year-over-year-rate improved to -2.3% from -6.7%. Separately, the May manufacturing PMI rose to 51.5 from 51.1.

On the other hand, domestic demand is soft as overall household spending rose 1.5% from a year ago, half of what was expected. The unemployment rate was unchanged at 4.1%, as expected.

Deflation pressures appear to be easing. Headline April CPI was 0.7% lower than a year ago. In March it was 0.9% lower. The core rate, which in Japan excludes fresh food and energy was -0.6% compared with -0.8% in March. Tokyo CPI figures have a less of a lag and this month prices were -0.2% year-over-year, half the decline the consensus forecast and follows a -0.3% reading in April. The core rate was more than halved to -0.3% after -0.7% in April.

There are also two financial developments to note. First, effective next week, mortgage rates are being increased for the second consecutive month. TA 10-year fixed rate mortgage interest rate will now be 1.6%, up 20 bp after a 5 bp increase in May. The new rate is the highest since Sept '11. Second, the BOJ reported that Japanese banks cut their JGB holds by 6.3% in the month of April to JPY156.1 trillon (or by about $100 bln). It is noteworthy that the yield on the 10-year JGB finished March near 60 bp and net-net it was essentially unchanged on the month.

The dollar slipped to a three week low against the yen on Thursday, just below JPY100.50. It posted an outside day, trading on both sides of Wednesday's range. The close was a tick or two above Wednesday's low. Although the dollar's technical tone has deteriorated, it has built a bit of a base between roughly JPY100.65 and JPY100.95 for the past six sessions going in May 31. The lower end was frayed a bit, but it the greenback snapped back.  On the upside, we would now peg initial resistance in the JPY101.30-50 area.   Japan is still to report April housing starts, but the die appears cast, with a rebound in stocks and bonds in the opening hours in Tokyo.