Japan will not join the PIIGS club

In the era of the debt crisis in the euro zone, a downgrade of a large developed country, a key debt issuer in Asia, must raise concerns. The Japanese fiscal situation, however serious, will not have a similar market impact as the PIIGS had, at least not in a near future. The Japanese general government deficit is large and the debt of the public sector is indeed massive. Yet, the Japanese public finances are characterized by one distinctive feature – domestic financing. While the debt to GDP ratio is bound to exceed 200%, external debt is thin, and nearly entirely covered with the reserves. That’s strikingly difference than Ireland for instance, where a relatively low public debt (earning Ireland high ratings for quite a while) was accompanied by huge and growing external (mostly banking) debt. So while the fiscal outlook for Japan is grim and definitely has a negative impact on the economy, Japan is not only unlikely to need any external support any time soon but actually may still provide a support elsewhere (as it did this month, even if it was more symbolic than real). Therefore, while negative, the rating story will not be dominant on the yen market – the US labor market and market rates will.

Technically, a rating cut could have provided a boost for the bulls and actually a bullish scenario looked likely yesterday morning. Should the claims data support the dollar, the USDJPY would be probably above 83,50. However, the US data fully disappointed (once again the poor Japanese data on retail sales and households spending had no similar effect on the forex) and complicated the picture. The pair is yet to test a resistance at 83,50 and confirm the bullish aspirations. Should it fail, a support at 81,82 is a line of defense for the buyers.  

Claims up again, hurt the dollar

As mentioned above, the US initial claims report disappointed again, placing more question marks on the recovery story on the US labor market. The report showed the number of initial claims rising to 454k – the highest since October. It was also a second spike in the last three weeks, a signal that investors will not see readings below 400k threshold on a regular basis soon (as was hoped). Unsurprisingly, the data had a negative impact on the US yields and thus hurt the dollar. Obviously, claims figures are volatile, but the readings we had in January so far suggest the US market rates might not support the greenback for a while.  

Events to watch – US GDP

UK’s data released on Tuesday showed that while the GDP report is sometimes thought to confirm what is known (from the monthly data), there might be serious surprises. Today investors expect the advance GDP in US (8.30 ET, 14.30 CET, consensus +3,5%). Attention should be paid not only to the headline number but also to the structure – the growth was fueled by the inventory rebuilding process as of late and obviously that cannot be continued indefinitely. Later, the final UM sentiment index (9.55 ET, 15.55 CET, consensus 73,2 pts.) will be released and earlier there is a KOF index release in Switzerland (5.30 ET, 11.30 CET, consensus +2,1 pts.). Chevron (2,40 USD consensus for EPS) and Ford (48c) are among companies to report quarterly results today.

Przemysław Kwiecień PhD, Chief Economist

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