Lee Hardman, Currency Analyst at MUFG, suggests that the weakness in the Japanese equity market and the strengthening of the yen likely reflects as well a further loss of investor confidence in Abenomics following the release overnight of the weaker than expected Tankan report for Q1.
Key Quotes
“The report revealed that business confidence amongst large manufacturers declined sharply from +12 in Q4 to +6 in Q1 reaching its lowest level since Q2 2013. Large manufacturers marked down their assumptions for USD/JPY which is now expected to average 117.46 in the current fiscal year. In comparison with our own lower forecasts for USD/JPY, the updated assumptions still appear somewhat optimistic which could prompt a further hit to business confidence.
Business confidence amongst large non-manufacturers deteriorated as well but declined more modestly from +25 in Q4 to +22 in Q1. However, it still remains well above levels prior to the implementation of Abenomics policies when it averaged +9 in the first half of 2013. The Tankan report will increase pressure on the BoJ and the government to provide additional stimulus to support economic growth ahead of the upcoming elections in the summer.
In contrast, it was revealed overnight that business confidence in China improved in March signalling that looser policy there is helping to support growth in the near-term. The official manufacturing PMI survey increased sharply to 50.2 in March reaching its highest level since June of last year. The Financial Times also reported that their own FTCR China Business Activity Index increased even more sharply to 57.9 in March. Building evidence of a cyclical upturn in growth is offering support for commodity related currencies in the near-term.”
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