The Bank of Japan says that inflation is accelerating and does not need expansive monetary policy, but the economy is expected to weaken further. GDP growth was 0% for 2018, including a contraction of -2.60% in Q3. Momentum is fading: the manufacturing PMI fell for the first time in 2.5 years. The decline comes from weaker sales to China amid continued trade frictions and weaker domestic manufacturing demand. In the event of an agreement between the US and China, the economy might be facing difficulties, as China’s pledge to buy semiconductors from the US could hurt the third largest electronic product industry in the world. No changes in Japan’s labour market, with January’s jobless rate at 2.50% (prior: 2.40%) and still its lowest range in 26 years. With the prospect of a US-China trade deal as early as mid-March, safe haven JPY is less in demand. We expect a rebound of USD/JPY from late February’s low (110.59) to sustain in the coming weeks.
Currently trading at 111.98, USD/JPY is heading along 112.20 short-term
Asian shares bounce
Asian stocks were higher across the board today as the MSC Index said it would increase weightings of Chinese mainland shares in its EM index, which is followed by over USD 2 trillion of assets. This is a meaningful shift: EM stocks and FX responds to flows. Of course this reallocation will not occur all at once; that would overwhelm investors and disrupt normal market behaviours. Saudi Arabia and Argentina will enter the index with a total of 2.9% weight, but the big new is China A-Share weight will climb 5x to over 3%.
