Week in FX Asia – China and Japan Look to Governments to Stimulate Economy

• Japanese pensions hold key to Abenomics
• USD/JPY breaks through 109 aiming for 110
• China PMI slightly higher just above expansion

USD/JPY continues to climb towards 110

The comments from the Minister of Health regarding the country’s Pension Fund gave some strength to the JPY in a week that otherwise was USD positive. The new comments that closed the week regarding changes to the pension fund’s mandate and asset allocation weakened the currency.

The USD/JPY has gained 4.9% in September. The strength of the US economy has pushed the USD higher against all major currencies. In contrast the Japanese economy continues to struggle to get back on a growth track. The ghost of the April sales tax continues to plague the economy. The USD/JPY pair started the month at 104 and has steadily climbed to 109. Next week’s US Non-farm payrolls could further consolidate USD strength and break the 110 level.

Japan’s Government Pension Investment Fund

It is a known fact that the Japanese hold a very high savings rate. The Yen has benefited from local demand, even when rates were not attractive to foreign investors. Another well known fact is the age makeup of modern Japan. Retirees and the elderly are a big part of the inverted pyramid of Japanese demographics. What has not been common knowledge until now is how important to the strength of the Yen is the Pension plans or in this case the $1.2 trillion Public Pension Reserve.

The government wants to allow the pension fund to seek higher returns elsewhere. Currently it holds more than 50% in local bonds. Comments from the Health and Welfere Minister, to which the pension fund reports earlier in the week pointed to a slow and steady change. The markets saw it as a sign of Yen support. Friday the Welfare Minister made comments that changes to the pension fund could be made without new legislation.

Shinzo Abe’s government want the GPIF to buy less local bonds for two reasons: Ensure JPY weakness to give exporters a competitive edge. Boost the stock market rally that is slowing down.

Market participants are closely following any developments as a new arrow for Abenomics could be leaving the quiver.

China PMI a hair above expansion reading

The HSBC Flash Manufacturing PMI was released earlier this week. The reading of 50.5 was slightly above expectations and the previous reading of 50.2. This is just a hair above expansion which will not be comforting to the Chinese government as it is not a sign of accelerating growth. The government announced last week that it will inject $81 billion into the 5 largest banks to spur lending. This move was criticized by analysts as there were better alternatives that would have met the targets if the government had not focused only on state-owned banks.

Next Week For Asia:

The ECB is set to take the stage next week. German numbers continue to be solid when compared to the rest of Europe. The fact is that Germany is not immune economic woes and the sentiment polls have shown there is lack of confidence from business and consumers alike. Mario Draghi and company have the difficult task of convincing the market with words as there will be little change in actual actions.

Friday’s Non-farm payrolls in the US will help or hurt the case of a faster rate hike. Federal Reserve members have spent all week contradicting their forecasts in the media, which has left a lot of uncertainty on the timeline on when the Fed will hike rates. Currently the majority of analyst are envisioning a Q2 rate hike at the earliest. A good employment number might bring that a little close to the present.

Wednesday the Chinese NBS Manufacturing PMI data will be released. The Flash PMI from HSBC has already prepared the market for a number very close to forecast and previous reading. China is not growing at the pace the market or their own government needs.
Australian Trade Balance will be published on Thursday and Asia will close the week with the release of the China Non-Manufacturing PMI on Friday.