Week In FX Asia – Sales Tax Hike Boosts Q1 Numbers In Japan

JAPAN

• Sovereign debt rises to $10.08 trillion
• BOJ Governor says sales tax effect contained
• Introduction of sales tax hike gave boost to economy in Q1
• BOJ to increase reserves

The first quarter results was solid for Japan. The sales tax hike had a positive transitory effect as consumers rushed to purchase big ticket items before it was introduced. There is an ongoing debate on what the long term effect of this tax will have given the sluggish recovery of the economy. The reason why it was introduced was made even more pressing this week as the sovereign debt numbers stand at $10.08 trillion in 2013. Japan must find a way to balance their fiscal deficit and not rely on outside debt. The only way to do this is to cut services and increase taxes. This will be hard sell on the population and could hurt PM Abe political stability.

The Bank of Japan continues to be the main driver of Abenomics. The 2 percent inflation target has been reinforced by the BOJ, but there are a lot of doubts if it can be achieved. The central bank needs to increase the amount of reserves given the QE program and the pressure to expand it.

The JPY has been trading in a 101 range all week. Foreign central banks around the world had more to do with the price of Yen that the BOJ. Janet Yellen and Mario Draghi both talked down their currencies for different reasons. The US is showing signs of recovery, but Fed chair Yellen focused on the employment risks going forward. Draghi over at the ECB disappointed by not cutting rates or brining forth a QE program to stop the threat of deflation. Draghi did his best to talk down the EUR which was close to the 1.40 line.

CHINA

• Housing Bubble Arguments gather more data
• Exports Rise 0.9%
• Service Expansion slows down in April
• China inflation drops to 1.8%

China had a week of mixed indicators. Inflation decreased which is a positive for the central bank as it leaves it room to set policy to boost growth. Exports rose by 0.9% in April. The increase although minimal is enough to disprove the overall slowdown in appetite for Chinese goods around the world. The main risk continues to be that China might not meet its target of 7.5% growth in 2014.

The housing sector continues to worry investors. Real estate developers continue to halt projects. Nomura has called for the end of the housing boom in China. Ironically the local government is somewhat responsible for the end as it has tried to limit the amount of speculation in the market. At this point it is too early to tell if deflating the bubble will be better in the short term as it could have a heavy impact on employment.

The services industry has lost momentum in April. Employment growth is at a seven month low. The government is aware of the risk of not meeting targets and again pledged to push forward the necessary reforms to make it a reality. The most expected reforms are around financial markets which remain closed off to external investment.

• Japan Debt Grows Forcing Abe to Get Real About Fiscal Reform – MarketPulse
• Chinese Real Estate Developers Signal Drop in Construction – MarketPulse
• Chinese Producer Price Index Drops 2 Percent in April – MarketPulse
• Japan Growth Boosted by Pre Sales Tax Consumption – MarketPulse
• BOJ To Quadruple Rate of Reserves To Offset QE Assets – MarketPulse
• China Reaffirms Pledge To Reform Capital Markets – MarketPulse
• China Inflation Drops to 1.8 Percent in April – MarketPulse
• Chinese Premier Confident in 7.5 Percent Growth in 2014 – MarketPulse
• China Data Leads Asian Equities Higher – MarketPulse
• China Exports Up 0.9% – MarketPulse
• China's Trade Unexpectedly Rises – MarketPulse
• Japan PM Abe Says OECD Needs To Push Fair Trade – MarketPulse
• Chinese Services Expansion Slows Down in April – MarketPulse
• Japan PM Abe Reaffirms EU Trade Pact Next Year – MarketPulse
• Report: China's Property Bubble has Burst – MarketPulse
• Asian Markets Fall to One Month Low – MarketPulse
• Nomura Says Chinese Housing Bubble Has Burst – MarketPulse
• India's FinMin Says Growth Will be 6 Percent in 2014 – MarketPulse
• BOJ Governor Confident the Sales Tax Hike Effect Will be Contained – MarketPulse