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Flash: Japanese Trade Data due tomorrow - DBS Group

FXstreet.com (Barcelona) - DBS Group analysts note that the external trade data for April are due to release tomorrow and based on the preliminary figures, export growth picked up to 5.0% YoY in the first 20 days of April and import growth slowed to 3.1%.

For the full month, they expect export growth of 5.4% YoY and import growth of 7.9%. Trade deficit is projected to narrow for the second consecutive month to JPY 620bn (sa), compared to JPY 920bn in March and the peak of JPY 1.1trn in February. They feel that the improvement in merchandise trade so far primarily reflected the translation effects of a weaker yen. Further, he adjustment in export/ import volumes is not obvious yet.

That said, they continue to note a genuine improvement in services trade is already in sight. They write, “Services trade deficit has fallen sharply to JPY 150bn in March, halved from the peak level of JPY 310bn in Sep12. The depreciation of the yen has boosted the number of foreign tourists visiting Japan. After all, the adjustment of personal travel decisions is relatively quick, if compared to corporate behavior of pricing and ordering.”

Besides the improving outlook of external trade, the team note that the direction of funds flows also points to stabilization in the yen exchange rates. Previously they see that it was true that Japanese investors started to boost securities investment in overseas markets since late April, after selling foreign securities persistently to take profit in 1Q. However, they see that the size of increase has remained fairly small (JPY 690bn bonds,JPY 29bn equities in the past three weeks), and this was well offset by the synchronous increase in capital inflows into Japan, as foreign investors boosted their holdings of Japanese financial assets(JPY 1.5trn equities,JPY 440bn bonds).

Further, they note that the outperformance of the Nikkei is undoubtedly an attraction to foreign investors. Meanwhile however, the domestic-foreign yield differentials are also turning less unfavorable. They write, “The JGB yields have been on the rise since the BOJ’s quantitative and qualitative easing in April. The 10Y JGB yield gained 27bps since the beginning of April, on expectations of economic recovery in Japan. This fully offset the rise in US Treasury yields during the same period (10Y: 13bps).”

They finish by noting that as GDP growth has quickened and inflation expectations have increased, the Bank of Japan is likely to refrain from further easing at tomorrow’s policy meeting, while only attempting to smooth the recent bond market volatility via fine-tuning market operations technically. They write, “The negative yield spread with the US shouldn’t be a big burden for the USD/JPY rate in the near term, unless the Treasury yields spike sharply driven by upside surprise in US economic data and growing expectations about the Fed’s QE exit.”

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