The Nikkei jumps on disappointing Japanese economic data

At first glance the above title may seem somewhat counterintuitive; one may expect that an equity index, an asset class that is generally classed as risky, to retreat on the back of economic data that shows its home country is underperforming the market’s expectations. However, the market is banking on the fact that softer than expected economic data will keep the QE flood gates open for a prolonged period of time, which is generally a broad positive for stocks in Japan.

Inflation isn’t heading in the right direction

The data showed that headline consumer price growth was 2.4% last year, while core CPI fell to 2.5% y/y in December from 2.7% y/y a month earlier. Once the effects of the hike in the sales tax are taken into account core inflation is probably not much higher than 0.5%, which is well below the BoJ’s target of 2%. Furthermore, we aren’t expecting to see a significant pick-up anytime soon, which is likely going to keep the printing press on at the BoJ on for the foreseeable future.

Other economic numbers released from Japan today were also fairly disappointing and reinforce or view that consumer price growth is going pick-up in the near-term. Industrial production increased a measly 1.0% in December (expected 1.2%) and overall household spending fell 3.4% y/y (expected -2.3%).

Nikkei

The Nikkei 225 jumped around 1% higher at the open before retracing from some long-term resistance around a trend line (see chart). A break of this trend line may set the index up to test an all-important resistance zone around 18,000. On the downside we’re keeping an eye on 17,575.

Source: FOREX.com, Bloomberg (note: this a BLOOMBERG chart and may not represent the prices offered by FOREX.com)