Declining Current Account; Moderate Industrial Activities

On Monday February 9, 2015, Japanese Ministry of Finance released data that the current account changed by +0.98T for the month of December. The surplus has declined for a long time. The current account is directly linked with the demand for the currency as a surplus indicates foreigners are buying more of the domestic product and hence the currency.

Combined with Bank Of Japan’s quantitative easing programs and Japanese Government’s Abenomics, this is quite bearish for the yen.

Later on Tuesday the Japanese Minister of Economy, Trade and Industry announced that the Tertiary Industrial Activity m/m declined by -0.3% in December, below the forecast of an increase of +0.1%.

Tertiary Industrial Activity is the total value of the services purchased by businesses. It is a leading indicator of the economic health. Businesses get affected by market conditions quickly and changes in their spending, thus, can be an early signal of future economic activity such as hiring, earnings, and investment.

On Wednesday, Japan announced a surprise increase of +8.3% in the Core Machinery Orders m/m in December, above the estimate of +2.4% and prior months +1.3%. This is the change in total value of new private-sector purchase orders placed with manufacturers for machines, excluding ships and utilities.

It is a leading indicator of production. Rising purchase orders signal that the manufacturing activities will increase to fill those orders.

Impact on Currency And Equities

For the week yen remained almost unchanged. For the first couple of day of the week it stayed in a range after a big decline on previous Friday, February 6. Then in the middle of the week, after the Core Machinery Orders report, it fell against the dollar but gained most of it by the weekend.

The currency pair is making a descending triangle near the 2007 high 124.15, a significant resistance. It broke above the upper-limit on Wednesday but then fell back into the triangle by Friday. A convincing break out of the pattern and above the 2014 high of 121.847 would propel the pair to 135.00.

Like yen, Nikkei 225 is also near 2007 high. It too is trying to overcome the 2014-high resistance. If it breaks above the resistance then it will complete a double-bottom pattern. The measured target of the pattern is near 19,150. This is almost 7.0% away from the current levels.

The relative strength of Nikkei 225 versus S&P 500 is on a uptrend since the summer of 2014. In between, October-November period, Nikkei underperformed the S&P 500. For most of the remaining period it out performed the U.S. index.

Japanese ADRs

Some of the large Japanese ADRs trading on U.S. exchanges: Cannon (CAJ), Honda Motor (HMC), Mitsubishi UFJ Financial (MTU), Mizuho Financial (MFG), Nippon Telegraph and Telephone (NTT), Nomura (NMR), NTT DoCoMo (DCM), Sony (SNE), Sumitomo Mitsui Financial (SMFG), and Toyota Motors (TM).

Some of these ADRs like HMC, NTT, DCM, SNE and TM are either outperforming the SPY or their ratio is changing the trend. (click on the charts to enlarge)