Yen Continues to Trade Near Four-Week High as Vaccination Gathers Pace

The Bank of Japan left the near-term benchmark interest rate unaltered at -0.1% and maintained the target for the 10-year Japanese government bond yield at about 0% during the July meeting, as broadly anticipated, supported by a 8-1 vote. In the quarterly forecast report, the central bank trimmed its outlook for the GDP for the current fiscal year to 3.80% from previous forecasts of 4% stated in April, against the backdrop of Covid-19 impact.

The board, nevertheless, retained its growth forecasts by stating that the economy is on course for a slight rebound, upwardly amending its growth outlook for forthcoming financial year to 2.7% from 2.4%, as vaccinations are being carried out at a brisk pace. In the meantime, the board upwardly revised consumer inflation outlook for the FY21 to 0.6% from previous forecasts of 0.1%, aided by higher energy costs.

The Japanese yen remained steady at 110.10 against the greenback after hitting four week highs in the earlier week. Sentiment stood subdued after Prime Minister Yoshihide Suga’s government announced the fourth emergency for Tokyo to contain the spread of Covid-19 infections. Domestic 10-year bond yields were trading near 6-month lows of 0.023% while the US 10-year rates offered a yield of 1.343%. Core machinery orders, devoid of ships and electric power enterprises, increased 7.8% m-o-m in May, reflecting the third successive increase and the sharpest since October 2020.

Industrial production fell by 6.50% m-o-m in May 2021, a few notches higher than the 5.90% decrease forecast in the preliminary reading and following a 2.90% increase in April 2021. The reported figure was the first drop in industrial output since February, against the backdrop of revived prohibitions in certain parts of the country following a jump in domestic Covid-19 infections.

Industries that primarily paved way for the drop were motor vehicles which reported a drop of 19.40% in May. Also, production machinery reported a 6% decline. Even electrical machinery and information and communications electronics equipment posted a 4.6% drop. On y-o-y basis, industrial output jumped 21.10% in May, reflecting the third successive month of growth in a row, following a 15.80% in April.
The Tankan sentiment index for manufacturers, published by Reuters, increased to 25 in July, from 22 in June, reflecting the highest level since November 2018 as export dependent companies gain from a rebound of worldwide demand. Optimism improved mainly among chemical, metal products maker and car manufacturers.

On the contrary, textiles and paper industry were pessimistic. In the meantime, the service index declined to -3 in July, from almost a flat reading in the earlier month, following the enforcement of another round of emergency in Tokyo due to a surge in Covid-19 infections.

Japan’s producer prices increased 5% y-o-y in June 2021, following an upwardly amended 5.1% growth in the earlier month, and higher than economists’ estimate of 4.70%. The reported figure reflects the fourth consecutive month of producer price inflation (PPI), against the backdrop of sharp rise in commodity prices. While beverages & foods posted a 1.90% increase in June, compared with 2.20% in May, chemical recorded a growth of 9.70% in June, against 9% in May.

Petroleum & coal products grew by 42% in June, versus 53.50% in May. Also, iron and steel increased by 9.3% in June, following a rise of 7% in May. Similarly, metal products inched higher by 0.2% in June, following an increase of 0.3% in May. Non-ferrous metals, production machinery and other manufacturing industry products recorded an increase of 37.60%, 0.8% and 0.3%, respectively. In the meantime, prices of electronic components remained unaltered for the second consecutive month.

On the contrary, cost declined 0.1% for transportation equipment. Electrical machinery & equipment fell by 0.6%. General machinery and information posted a drop of 0.1% and 2%, respectively. Producer prices rose by 0.6% m-o-m in June, after increasing by 0.8% in May.

Core machinery orders, devoid of ships and electric power firms, posted a rise of 7.8% m-o-m in May, surpassing market forecasts for a 2.6% rise, following a 0.6% increase in the previous month. The reported figure was the third consecutive month of increase in machinery orders, against the backdrop of an additional 2.8% growth in manufacturing orders in May, aided by electrical machinery.

Non-manufacturing orders increased 10% in May, following a drop of 11% in April, driven by other non-manufacturers and telecommunications. On y-o-y basis, core machinery orders surged 12.20% in May, eclipsing analysts’ estimates for a 6.3% increase, and following a 6.5% growth in April.