Yen’s fluctuations continue to affect markets

Asia (including Japan)
Asia including Japan Briefing –

Medium-sized Japanese companies outperformed their larger counterparts during August as exporters remained hostage to the yen’s strength. The Nikkei 225 Index and the Topix Index rose by 1.9% and 0.5% respectively over the month; in comparison, the TSE Second Section Index climbed by 2.8%.

Better-than-expected US employment data fuelled expectations of further monetary tightening in the US Federal Funds rate. As a result, the US dollar appreciated against the yen , providing some support for the share prices of Japanese exporters early in August. Later in the month, however, the effects of longer-term strength in the yen were demonstrated by disappointing trade data , which showed that ongoing yen strength had resulted in a 14% annualised decline in exports during July. Imports fell by 24.7% over the same period. The data led to a sharp drop in share prices in the middle of August.

A package of economic stimulus measures worth 28 trillion yen was approved by Japan’s cabinet early in the month and will make up part of a supplementary Budget in September. The measures are intended to support Japan’s struggling economy, but received only a lukewarm reception from investors.

Japan’s economy expanded at a lacklustre annualised rate of 0.2% during the second quarter. Inflation continued to cast a shadow as the consumer price index registered another decline, falling at an annualised rate of 0.5% during July. Nevertheless, as August drew to a close, investors drew encouragement from some positive economic data: Japan’s rate of unemployment fell from 3.1% to 3%; meanwhile, household spending held up better than expected, falling by a smaller-than-anticipated 0.5%.

The Reserve Bank of Australia (RBA) cut its key interest rate from 1.75% to 1.5% – its lowest-ever level – during August. Inflation remains subdued in Australia, suppressed by muted growth in domestic labour costs and low cost pressures overseas, and RBA policymakers agreed that further monetary easing would support economic growth and inflation in the longer term. The ASX All Ordinaries Index fell by 2% during August. The RBA expects the country’s economy to grow by between 2.5% and 3.5% during 2016, after which it is forecast to pick up to reach 3%-4% by 2018. However, policymakers are concerned about headwinds to growth, including the outlooks for Australia’s labour market and for China’s economy, which remains a potential hindrance to global growth and demand for commodities.