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How Healthy Is Japan Heading Into October?

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How Healthy Is Japan Heading Into October?

  • Morgan Stanley sees the latest monthly Tankan data as “resilient.”
  • The firm believes data are good enough that the Bank of Japan will not elect for monetary easing in October.
  • Morgan Stanley believes that supplementary budget stimulus is a much more likely outcome in the near term.
  • In a new report, Morgan Stanley analyst Takeshi Yamaguchi looked at the latest economic numbers out of Japan heading into October. It’s no secret that Asian rival China has been dealing with economic struggles in recent months, but has the weakness spilled over to Japan?

    The Numbers

    The diffusion index (DI) of Tankan large manufacturing enterprises came in at 12 for September, while the DI of non-manufacturing large enterprises came in at 25.

    Related Link: iShares Introduces Currency Hedged Version Of Topix 400 ETF

    “Overall, the Tankan data seem resilient, as large non-manufacturers DI unexpectedly improved, while large manufacturers DI fell only marginally,” Yamaguchi noted.

    He added that DI for economic trend-sensitive SMEs came in within the expected range.

    Monetary Policy Impact

    Yamaguchi believes that the September Tankan numbers are good enough to stave off additional monetary easing for now. “Although recent economic data have been soft, we expect the government to respond with fiscal measures (economic stimulus via supplementary budget), not monetary policy,” he explained.

    According to Yamaguchi, Japan is still not out of the woods when it comes to monetary easing in the next six months, but such measures are now highly unlikely to come in October. “We believe chances of additional easing are low at the October meetings since that would be totally inconsistent with the BoJ’s statements hitherto that the underlying inflation trends are solid,” he wrote.

    Playing Japan

    Investors that believe the worst of the economic weakness is now behind Japan are likely looking to buy the dip. Shares of the iShares MSCI Japan ETF (NYSE: EWJ) and the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) are down 8.7 percent and 11.9 percent, respectively, in the past six months.

    Disclosure: The author holds no position in the stocks mentioned.

    Image Credit: Public Domain

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