Will Japan Continue the Ultra-Easy Money Policy?

Japan's industrial output rose 0.5% in October from the 1% decline in September. The 0.5% rise was caused by an increase in the production of semiconductors, car parts, and machines used to make flat panel displays.

The increase was less than expected, but companies forecasted production to rise strongly in November and December as robust overseas demand continue to support factory activity and broader economic growth.

Japanese retail sales fell 0.2% in October compared to the same month last year. The retail sales dropped for the first time in a year due to weak sales of food and beverages. Mainly because of poor weather, including two typhoons, that kept consumers away from stores and restaurants.

Earlier this month, the data showed that Japan's economy grew faster than expected in the third quarter thanks to steady exports, posting the longest period of uninterrupted growth in over a decade.

The government stuck to its moderately upbeat view on the economy in November, the monthly economic report showed. The government said that it remained on a recovery path encouraged by consumer spending and business investment.

The Bank of Japan (BOJ) is likely to point to the country's steady economic growth as an indication that price pressures will eventually build up and inflation will reach the central bank's 2% target.

Hence, there has been an ongoing debate on whether to exit the ultra-easy money policy or keep the stimulus on.

BOJ board member, Goushi Kataoka said the central bank must expand stimulus further to achieve its 2% price target early, so that prolonged monetary easing does not hurt the country's banking system. He said it would be premature to withdraw the easy money policy.

This was counter to many others in the nine member board who hinted that BOJ's should roll back the stimulus.

BOJ Deputy Governor, Hiroshi Nakaso said that the central bank has the necessary tools and expertise to engineer a smooth exit from ultra-easy policy. In a way signaling that BOJ should end the stimulus program. He also said the BOJ could learn from the US Fed's efforts to dial back stimulus. He is also of the view that the stimulus could threaten to destabilise Japan's banking system.

BOJ governor, Haruhiko Kuroda said that the central bank's ultra-loose policy was not causing any serious damage to Japan's banking system. Prime Minister Shinzo Abe also expects the BOJ to promote bold monetary easing to achieve 2% inflation.

Given these contrasting opinions, let's see if Japan withdraws the easy money policy or not. Meanwhile, we'll keep you updated on all the developments in this space.

In news from global cryptocurrencies. Bitcoin's stellar rise has been hitting the headlines recently. Bitcoin went up by 121% in 2016, making it the best performing asset class that year. After such a phenomenal rise, one would think it would run out of steam; but instead, bitcoin has continued to surge unabated and is up by a whopping 960% since the beginning of this year.

Bitcoin saw a massive, sudden spike just after it broke through the closely watched milestone of US$ 10,000 per bitcoin. The cryptocurrency traded at an all-time high of US$ 11,377, according to industry site CoinDesk.

The price however, dropped drastically to US$ 9,200 from the all-time high after many users found themselves locked out of two of the biggest cryptocurrency exchanges in the US. This underlines the volatility in bitcoin and other cryptocurrencies.

Bitcoin and cryptocurrencies are a curious bunch. They have no central bank backing and have not yet been regulated. Yet, these seem to have found favour among a large number of people, with demand growing every day. There are over 800 cryptocurrencies in existence today, with new ones being added to the list every day.

While the world of digital currencies is intriguing, it can get very confusing for the layman. Our team member, Ankit Shah, Research Analyst, has decided to study cryptocurrencies and help our readers understand them.

Here's Ankit's take in a recent edition of Equitymaster Insider:

    "I've been studying and tracking bitcoin for a while, and though I still understand very little about it, I believe that it is a revolutionary technology that could transform a range of businesses and money itself. It would be naive to dismiss it as a passing fad."

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Global indices ended the week on a negative note. European stocks traded on a weak note. Germany (DAX) ended with a loss of 1.52%, France (CAC) ended with a loss of 1.36%, and the London market (FTSE) was down 1.47%. Asian markets ended the week on a mixed note. The Nikkei Index was up 1.19%, the Hang Seng Index was down 2.65%, and the Shanghai Index was down 1.07%. US markets traded in the red and ended their session with a loss of 0.81%.

Indian Stock Markets Plunge on Geopolitical Tensions

Back home, the Indian indices ended their weekly session on a negative note. The BSE Sensex was down 2.51% for the week, while the NSE Nifty was down 2.58%.

Barring realty (+0.48%), all the sectoral indices ended the week in the red. Metal (-4%), IT (-3.14%), and Energy (-3.09%) were the biggest losers for the week.

In the news from the economy. The Central Statistics Office (CSO) published the Gross Domestic Product (GDP) numbers this. During the April-June quarter, the Indian economy climbed at the slowest pace in the last thirteen quarters. GDP growth showed a recovery despite the rollout of GST in this quarter. The economy grew at 6.3% as compared to 5.7% in the previous quarter.

From the other development, the Standard & Poor's (S&P) retained its outlook on India as stable, and kept the rating unchanged at BBB-.

While the agency retained its rating on India, it also lauded the Modi-led government's fiscal consolidation drive; under which multiple reforms were taken towards the path of a favorable economy including the Goods and Services Tax (GST), Insolvency and Bankruptcy Code, 2016, and others.

The report noted that despite two quarters of weaker-than expected growth, Indian economy will grow robustly from 2018-20, and foreign exchange reserves will continue to rise.

Further, it stated that over the next two years, India's growth will remain strong and fiscal deficits will remain broadly in line with the expectations.

While upward pressure on ratings could be created with an improvement of the economic reforms, downward pressure could emerge if GDP growth disappoints, fiscal deficit rises or political will to maintain the reform agenda loses momentum, the reports noted.

It states that confidence and GDP growth in 2017 were shaken by the demonetisation initiative, and the new taxation scheme, which resulted in dampening of growth.

However, the report noted that growth in the medium term will be supported by the bank recapitalisation plan and public-sector-led infrastructure investment, which is expected to stimulate economic activity along with robust private consumption.

Against the backdrop of the planned ramp-up in public-sector-led infrastructure investments, as well as persistent deficits at the state level, the company noted that the large general government debt load and India's overall weak public finances continue to constrain the ratings.

These reflect the country's strong GDP growth, sound external profile, and improving monetary credibility. These strengths are balanced against vulnerabilities stemming from the country's low per capita income and relatively high general government debt stock, net of liquid assets.

Moreover, bond yields too rose 3 basis points to 7.03% on the back of the S&P rating review.

It's pertinent to note that India's public debt is mostly funded internally. While scheduled commercial banks, insurance companies, provident funds, and RBI invest in 85% of the government bonds, there is a miniscule 4% participation by the overseas investors.

Ironically, despite a benign business environment, the bond yields in India have been ascending. Since the global financial crisis, India's bond yields have firmed up by a whopping 1.7%, putting it in line with countries like South Africa and Russia whose economies are in a state of mess.

In news from the Goods and Service Tax (GST) space. GST collections showed signs of slowing down as collections fell to Rs 833 billion in October from over Rs 900 billion in each of the first three months after the new tax regime was launched on 1 July 2017.

The government has offered a couple of reasons for revenues to be lower in October. One, the first-time requirement of paying IGST on transfer of goods from one state to another state, even within the same company. This meant an additional cash flow of IGST in the first three months, but the same was not being utilised for paying CGST and SGST when the final transaction of these goods took place. Two, the overall incidence of taxes on most of the commodities had come down under GST.

As we have been saying, GST is a much-needed economic reform. It should eventually expand India's narrow tax base and increase government revenues. But only growth will determine how well the Indian economy has adapted to GST.

Nifty 50 Index Ends November Expiry 1% Down
Nifty 50 Index Inched a Percent Higher

This week, the Indian stock markets ended its November futures and options (F&O) expiry. Let's have a look at how the Nifty 50 Index performed.

It was a thrilling expiry for the Indian indices. During the start, the bulls had an upper hand where the index hit a fresh life-time high of 10,490. Mid-expiry, the bears took charge. But, the Moody's upgrade of India's rating came as excuse to the bulls and the index once again resumed its up move. But towards the end of the expiry, the bears once again dominated. Finally, the index ended the November series with a cut of 1%.

The index is currently trading above its important support level of 10,100. For the index, the 10,100 level which acted as a strong resistance on the way up is now expected to act as a strong support. Mid-November, the index bounced strongly from this level. And now again, it is trading close to the 10,100 mark.

So will the index once again see some buying here or will it slip further down? Let's wait and watch...

COMMODITIES

Gold Trades on a Negative Note

Gold traded on a negative note during the week. It opened the session gap up on Monday and continued to trade up to end the session positive. But the buying did not last for long and the yellow metal gradually slipped lower throughout the week. The selling was seen on back of weak global trend in the precious metals overseas and sluggish demand from local jewelers. The commodity also slipped lower on strong US growth data and Fed chairperson, Janet Yellen's bullish view of the economy. Finally, on Friday, gold recovered some of its losses and ended the weekly session with 0.58% loss.

Gold Ends in the Red

Crude Oil Witnesses Selling Pressure

Crude oil traded on a negative note during the week. It opened its session up on Monday but slipped immediately to trade in a downtrend until mid-week. The selling was seen amid uncertainty over a possible extension of output cuts by major crude producers and expectations of higher supply as the Keystone pipeline restarts. The commodity recovered most of its losses towards the end of the week. It finally ended its weekly session 1.18% down.

Crude Oil Ends 1% Down

CURRENCIES

Dollar Trades on a Tepid Note

The dollar traded in a downtrend during the week. It opened its session lower on Monday and traded dull until mid-week. The currency fell as Fed policymakers worry about low inflation in US. The currency recovered a bit on the final day of the week on account of short covering. Finally, it ended the weekly session half a percent down against the rupee.

Dollar Trades in a Downtrend

Commodities 24th Nov 01st Dec % Change
Gold/10 gms 29,380 29,209 -0.58%
Silver/kg 39,241 37,582 -4.23%
Crude Oil/barrel 3,807 3,762 -1.18%
Natural Gas/mmBtu 190.00 198.80 4.63%
Currencies 24th Nov 01st Dec % Change
USD / INR 64.91 64.65 -0.41%
EUR / INR 76.76 76.60 -0.21%
GBP / INR 86.18 86.98 0.93%
JPY / INR 58.03 57.60 -0.75%

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