BOJ still Optimistic about Current Recovery

BOJ still optimistic about current recovery

Last Friday’s meeting (22/08/2014), Janet Yellen (Chairwoman of the Federal Reserve) stated that the recent decline in the unemployment rate to 6.2%, does not imply that the labour market is improving. Unemployment claims are still in the range of 298K – 312K which is still high. There still exists a lot of slack in the economy as Janet Yellen stated. Thus if the slack in the labour market is cut then we could see an interest rate hike in mid-2015. In addition, it would be devastating for the economy if interest rates rose earlier then the Fed has forecasted, the economy is still in the early stages of recovery. In addition, an interest rate hike may increase the slack in the labour market due to less capital expenditure by firms. Janet Yellen requires more data to assess the current health of the economy before issuing a rate hike. The more data you have, the clearer the picture will be. The Fed need to be cautious about the overvalued S&P 500, when tapering stops in October. The pullback could be catastrophic to world-wide markets. Largely positive data came out last week in the US, key data included flash manufacturing PMI (Actual: 58.0, Forecast: 55.7, Previous: 55.8, 21/08/2014) and Philly Fed manufacturing index (Actual: 28.0, Forecast: 19.7, Previous: 23.9, 21/08/2014) which shows that the recovery is strong (especially the manufacturing industry). Key data this week is CB consumer confidence (Forecast: 89.1, Previous: 90.9, 26/08/2014) and prelim GDP q/q (Forecast: 3.9%, Previous: 4.0%, 28/08/2014) which we expect will be on forecast or above forecast, due to the current strong recovery.

The BOJ (Bank of Japan) is optimistic about the current recovery. However, investors are not very optimistic over the current recovery in Japan. This is due to factors, such as weak exports (even though a weak Yen) and the impact of the sales tax hike (from 5% to 8% in April 2014). The BOJ will be sticking to their current monetary policy (asset purchasing) and the BOJ will adjust monetary policy if needed in accordance with the health of the recovery. The ‘third arrow’ which has been fired by Shinz┼Ź Abe (Prime Minister of Japan) still needs to have an effect on data. This should help stimulate wage inflation, which will help stimulate growth in consumer spending and take the economy towards the 2% benchmark inflation rate. This week, we expect national core CPI y/y to be on forecast (Forecast: 3.3%, Previous: 3.3%, 28/08/2014) due to a lack of consumer spending. In addition, we expect household spending (Forecast: 3.3%, Previous: 3.3%, 28/08/2014) to be on forecast or below forecast due to the sales tax effect.


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