Japanese Fiscal Half Ending on Ominous Note

September 30, 2008

Japan releases a bunch of data on the final session of each month, and all of it so far has been weaker than expected.  The Nikkei slumped 4.7% in the morning trading session to show a drop of slightly  more than 10% from the end of the last fiscal year on March 31st.  10-year JGB yields settled back three basis points to 1.46%, but were 18.5 basis points higher than six months ago.  The jobless rate rose two-tenths to 4.2% in August, a 26-month high and 4/10th above the end-fiscal 2006 level.  Employment fell 0.6% from August 2007, the third straight month with a 12-month drop of at least that much.  The job offers ratio slid to 0.86, down from 1.06 a year earlier and at a 47-month low.  Real personal spending dived 3.4% m/m in August, more than reversing gains in July and June and depressing the 12-month decline to -4.0%, three times the expected drop.  Spending fell in spite of a 2.2% 12-month rise in real disposable income, underscoring the weakness of consumer confidence.  Japan’s PMI-manufacturing survey highlighted an intensifying slowdown, with a drop to 44.3, which was a 6-1/2 year low, the seventh sub-50 reading in a row, and the lowest score since end-2001.  Industrial production fell 3.5% in August, twice as much as expected, and the inventory-to-sales ratio surged 7.4%, indicating a serious unplanned accumulation of inventories that will now have to be run down.  Government officials characterized industrial production as having “weakened.”  That was the third such assessment in a row.  Industrial output fell by 0.7% in 1Q08 and 0.8% in 2Q08, and it is likely to fall by more than 1.0% in 3Q08.  August production was 6.9% lower than output in August 2007.  The yen, which closed Fiscal 2007 at 99.72 per dollar and 157.35 per euro, posted average levels in the first half of Fiscal 2008 of 106.1/USD and and 162.7/EUR.  However, the yen is currently trading at 103.8/$ and 149.2/euro.  Officials are worried that a strengthening yen due to very low risk aversion, not confidence in Japanese economic or political prospects, may lead to a deeper and longer recession than has been assumed.

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