Starting the week with inflation data, the annual consumer price index for October is expected to highlight deflation pressures, and likely lingering low expected with a drop of 0.4% following last month's 0.3% drop, indicating that the third largest economy remains far from recovery for now and in the circle of danger with recession and deflation threats at alarming levels.
Consumer prices are extremely important considering the Japanese government pledges to commit to achieving the inflation target for 2012 at 1%, which it hasn't achieved so far. The lingering pressure of deflation has also fueled the political debate and exploited by the opposition party to show the failure of the ruling Democratic Party in solving the country's economic crisis as they gain ground in polls ahead of the December elections.
Contrary to optimistic expectations, the Bank of Japan (BoJ) kept the monetary policy unchanged in its meeting last week and the stimulus programs steady at 91 trillion yens; it may not count too much on consumer prices especially after the decline in spending levels recently by consumers in Japan which is constant downside pressure on prices.
This is alarming for some reasons; the most important is the reliance of Japan on domestic spending along with exports, Japan's exposure to deflation maybe long especially after the Gross Domestic Product (GDP) contraction during the third quarter at its fastest pace since the 2011 earthquake.
Moving to the industrial production, the preliminary reading for October is expected to show the lingering weakness in the sector despite the expected slight improvement. Production is expected to have dropped 2.0% from the previous month following 4.1% drop in September.
The drop in output remains a clear indication of weak demand levels, in addition to the impact of the rise of the Japanese Yen that is hammering exports. With widening trade deficit we don't expect a positive reading for industrial production at this point, as well as drop of Japanese company's sale's recently in China due to the island conflict between the two countries.
Asian markets are not only focused on the economic data from the region, especially amid the global economic uncertainty and the fiscal crisis in Europe and the United States.
We can certainly see international interest in the U.S. budget talks due to its importance in effecting the state of the global economy, especially if Congressional leaders fail to avert the impending "fiscal cliff".
Till now it's still limited to vague statements by the U.S. President Barack Obama with optimism to avoiding the "fiscal cliff", the impact of which is likely to wane this week with no progress reported in talks. FED's Chairman Bernanke saying that he doesn't have the right tools to save the United States in case of "fiscal cliff" does raise the alarm, but Bernanke was still somewhat perceived as optimistic toward reaching a solution in an address in Atlanta last week.
As for Europe, as always the progress is slowing and nothing new has been brought up to the table! European finance ministers last week failed to reach an agreement with the IMF and delayed the release of the Greek aid tranche till this week, but the German Chancellor Angela Merkel said it's likely to reach an agreement to grant Greece the second rescue pack on Monday.
It will be indeed a hectic week for Japan and Asian markets amid the uncertainty over the outlook. The week will commence with the minutes of the meeting from the BoJ which is unlikely to add anything new after the bank in the meeting last week did not alter its monetary policy.
The bank might have to wait till after the elections to take another step as the bank remains also cornered as opposition party is fan to aggressive policy easing and will change the head of the BoJ and that surely means new policy heading in the nation shall they secure a strong win in the December election!
IMOH, Patrick E.
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