Japan’s Economy Is Not There Where the BoJ Would Like It to Be

Japan’s overnight data release has made investors worry over the country’s 2019 economic outlook.

Japanese Inflation Is Still Far From Target

Overnight, before the Tokyo opening bell, we received the Japanese data on its CPI and employment. In terms of inflation, before the release, there was no forecast available on the headline number. The previous figure was sat at +0.8%, whereas the new data had disappointed, as it came out at +0.3%. But it wasn’t so bad for the core CPI, which came out in line with expectations at +0.9%. Nevertheless, this is still lower by a tenth of a percent on a YoY basis from the previous number. We have to mention that the Bank of Japan’s, so-called “Price Stability Target” sits at +2.0%. Given that the Japanese inflation is still quite low, it might take a while, until the BoJ’s target could be reached.

Further slowdown in inflation could add more credence to our longstanding view that BoJ policymakers have still a long way to go before considering a meaningful step towards normalization. The summary of opinions from the latest BoJ meeting is also scheduled to be released. That said, bearing in mind that the Bank maintained its ultra-loose policy unchanged, without making any major changes to the accompanying statement, we don’t expect the summary to result in any fireworks.

Another number which was released by Japan, together with the CPIs, was the unemployment rate for the month of November. It had increased by a tenth of a percent, going from the previous low of 2.4% to the new 2.5%. The expectation was that it would come out in line with the previous one, but the slowing down of the Japanese economy might have affected the unemployment figure slightly. Even though the industrial production number for the month of November came out slightly better than expected, at -1.1% versus -1.7% forecasted, still, the forecast for the industrial production for 2 months ahead was at -0.8%, which could make investors worry later on. In addition to all that, the country’s retail sales number for the month of November had declined from the previous +3.6% to +1.4% on a YoY basis, which is around two and half times lower than in the month of October.

Nikkei 225 — Technical Outlook

The Nikkei 225 has ended the year below the opening price but managed to remain above the psychological 20000 barrier. Looking at our Nikkei 225 cash index daily chart, it has now dropped back below the 20000 mark. Our oscillators suggest that the index is quite oversold and could be ready for a bit of more correction to the upside. Overall, Nikkei 225 is on a downslope, trading below a short-term downside resistance line taken from the peak of the 1stof October. For now, we will stay put, but keep an eye on one of our key breakout levels.

If Nikkei 225 cash index moves up and breaks this week’s high near the 20200 barrier, this could be seen as a good sign for the bulls to step in and drive the index higher, towards the next potential area of resistance at 20795, marked by the low of the 29thof October. A break of that area may open the door to the 20980 zone, or even higher, to test the aforementioned downside resistance line.

Alternatively, a drop below the 19515 hurdle, marked by yesterday’s low, might invite a few more bears, so they could push the price a bit lower. This is when we will aim for the 19140 obstacle again, a break of which could force the index to re-test the December lows at around 18928, which if doesn’t stop the fall, a further decline may lead Nikkei 225 towards the 18660 support zone, marked by the high of the 21stof April 2017.

NZD/JPY — technical Outlook

After moving sharply lower the previous week, NZD/JPY has been trading sideways this week, between the 74.05 and the 74.95 levels. Because the downside momentum had eased off a bit, we will shift our views of the short-term outlook to a more cautiously bearish and wait for a break of one of the above-mentioned levels. Overall, the pair is still trading below its short-term downside resistance line, taken from the high of the 4thof December, which favours a slightly bearish scenario.

Because the New Zealand dollar still seems to be weak, we might see the 74.05 hurdle failing to hold the rate from dropping, and if that happens, this could clear the path towards lower support areas like the 73.52 zone. This is where on the 31stof October the rate got held and NZD/JPY moved higher. If that zone gets broken, a further decline may lead the rate to a test of the 73.17 obstacle, marked by the low of the 29thof October.

On the upside, if NZD/JPY moves higher and breaks above the 74.95 barrier, this invite a few more bulls to the table. We could then see the pair traveling further up to the 75.25 hurdle, a break of which may push NZD/JPY higher to test the 75.85 level, marked by the high of the 20thof December.

AS FOR THE REST OF TODAY’S EVENTS

The economic calendar doesn’t look very busy. That’s no surprise, given that we are in our last days of 2018.

During the European trading, Germany’s preliminary inflation data for December is set to be released. Expectations are for both the CPI and HICP rates to have declined to +1.9% yoy and +1.9% yoy from +2.3% and +2.2% respectively. This could raise speculation that Eurozone’s headline inflation, due out on the following Friday, may slow down as well.

I addition to that, crude oil inventories number is to be released during the US trading session. Currently, the expectation is that the figure could come out at -2.869M barrels, which would be a much bigger change from the previous -0.497M. If we see a cut in the supply of crude, this could have a positive effect on its prices.

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