(07 October 2019 ) DAILY MARKET BRIEF 2：Recession risk rising in Japan

The latest updates on the front of the US – China trade dispute have again given safe haven JPY a boost as China appears willing to narrow down the scope of upcoming trade talks taking place on Thursday and Friday 10 – 11 October 2019 in Washington. This should pave the way for tariffs hike from current 25% to 30% on USD 250 billion imported Chinese goods on 15 October 2019 and therefore intensify tit-for-tat sanctions from both sides, thus favoring a long-JPY bias by the end of the week. Meanwhile, the economic assessment downgrade of the Japanese government to “worsening” following the release of its business condition indicator confirms that the Japanese economy probably turned into recession as the new US – Japan partial trade deal signed only covers a small portion of existing bilateral trades

Since its initial statement that the Japanese economy is recovering at a moderate pace thanks to a solid domestic demand, the government is likely to change its stance as the sales tax hike from 8% to 10% implemented in 1 October should depress Japan’s private consumption and therefore worsen its outlook. The coincident index, which provides an evaluation of the health of the economy by computing data on industrial production, retail sales and employment, fell to 99.3 (prior: 99.7) in August, marking to August 2016 low. In that context, Japan’s quarter-on-quarter 3Q GDP figure released on 14 November should confirm a slowdown from 2Q 0.30%, paving the way to an increase in government spending and BoJ policy easing amid a potential technical recession by year-end. Further negotiations on US – Japan trade should continue as the existing agreement is mainly focusing on US beef and pork exports to Japan, omitting major topics such as Japanese auto, aircraft, or semiconductor manufacturing.

By Vincent Mivelaz