BOJ Minutes and Japan's Economic Data

Minutes of the Japan central bank's last policy meeting released this week showed that a majority of policymakers agree that the central bank must persistently pursue powerful monetary easing. But additional stimulus measures were unnecessary for now.

The BOJ kept its policy steady as preferred by most of its policymakers at the two-day meeting that ended on 31 October 2017. But newly added member, Goushi Kataoka preferred more easing. Thus, complicating future efforts by the bank to withdraw stimulus.

A majority of the members were of the view that extreme monetary easing only to achieve price goal could prevent monetary accommodation from producing the intended policy effects. So taking additional monetary easing now would have more demerits than merits.

Most members felt that maintaining current policy was sufficient, though conceding it may take some time before firms more actively raise prices and wages, the minutes showed.

The minutes also noted that the effects and costs of buying risky assets like exchange traded funds (ETFs) must be looked at from every angle even if the move had yet to distort market functions at this point.

The BOJ is lagging behind the US Fed and ECB in exiting the ultra-easy policy. But sooner or later, Japan will have to withdraw the easy money policy.

Meanwhile, Japan's household spend more than expected in November. It rose 1.7% in November from a year earlier. The slow and steady rise in household income was the reason behind spending improvement. Wage earners' disposable income rose 1.8% in November from a year earlier. A stock market boom is also giving households more purchasing power.

The core consumer price index (CPI) rose 0.9% in November from a year earlier. This marked the 11th straight month of gains. This was ahead of October 0.8% growth. Prime Minister Shinzo Abe has urged companies to raise wages by 3% or more next year, keeping pressure on firms to spend their huge cash pile to broaden the benefits of his stimulus policies.

Another data released this week showed that Japan's economy is slowly picking up the pace. The unemployment rate hit a fresh 24-year low of 2.7% in November from 2.8% in October. The job availability rose to a nearly 44-year high.

This series of upbeat data may offer relief to BOJ policymakers who are increasingly worried about the demerits of ultra-easy policy but wary of choking off a budding economic recovery by dialing back stimulus too quickly. So given the favourable data points, how soon the BOJ end the easy money policy will remain to be seen. Meanwhile, we'll keep you updated on all the recent developments in this space.

Moving on to news from the commodities space. Oil price is gaining momentum as it traded at its highest levels since mid-2015.

The international benchmark Brent crude, spiked as a pipeline run by Waha Oil Company that carries crude to Libya's Es Sider terminal exploded Tuesday, reducing output by 70,000-100,000 barrels a day.

The above drop in supply led to optimism of easing glut and helped crude oil trade on a positive note. Futures in New York and London touched the highest levels in more than two years after reports of the explosion came through.

Output in Libya, where oil fields have endured sporadic shutdowns and disruptions due to protests, power blackouts and fighting, rose to about 1 million barrels a day this year, the highest level in four years. Any drop in production will ease pressure on OPEC-led efforts to drain a glut.

Note that crude oil prices have been on a rising trend this year. However, this is not good news from India's perspective.

As Equitymaster wrote in a recent edition of The 5 Minute WrapUp...

    Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.

    Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.

    Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

You can read the entire article here.

Global indices ended the week on a mixed note. European stocks traded on a mixed note. Germany (DAX) ended with a loss of 1.19%, France (CAC) ended with a loss of 0.97%, and the London market (FTSE) was up 1.25%. Asian markets too ended the week on a mixed note. The Nikkei Index was down 0.60%, the Hang Seng Index was up 1.15%, and the Shanghai Index was up 0.32%. US markets traded in the red and ended their session with a loss of 0.80%.

Indian Stock Market Trades Volatile

Back home, the Indian indices ended their weekly session on a positive note. The BSE Sensex was up 0.34% for the week, while the NSE Nifty was up 0.36%.

Realty (+4.35%) Telecom (+3.45%), and Metal (+2.83%) were the biggest gainers for the week. Oil & Gas (1.31%) and Energy (-0.59%) were the biggest losers for the week.

Market participants are tracking the Financial Resolution and Deposit Insurance (FRDI) Bill under Parliament's consideration. As per the news, the social media is worried about the bill in that it will put bank deposits at risk and that depositors' money would be used to recapitalize banks.

The one concerning clause in the bill causing concern is the provision for a 'bail in'. In essence, the bill empowers a distressed financial institution to utilise its own public deposits to set its house in order.

Presently, only Rs 0.1 million worth of bank fixed deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). What the FRDI Bill proposes is, to utilise deposits above the insurable limit of Rs 0.1 million by converting the funds into shares of the bank. In other words, the FRDI Bill is simply an extension of the DICGC Act and is not draconian as it is made out to be.

The bill overlooks the truth that the insurance cover for public deposits in India is woefully low. The share of insured deposits has fallen drastically from 75% to less than one third in the last two decades.

Speaking of FRDI, Vivek Kaul, editor of Vivek Kaul's Diary, has recently shared his thoughts on the topic in a recent article. You can read the same here.

In the news from the macroeconomic front, as per an article in the Economic Times, as per a finance ministry announcement, India will borrow an additional Rs 500 billion this fiscal year.

The above borrowing comes as a negative development as it could breach the fiscal deficit target for the first time in four years and also weigh on bond and equity markets in India.

This additional borrowing could raise the fiscal deficit to 3.5% of gross domestic product (GDP), higher than the stated target of 3.2%.

The government has budgeted spending of Rs 21.5 trillion in FY18. Of this, it had spent Rs 12.9 trillion by October with a fiscal deficit of Rs 5.25 trillion against a full-year fiscal deficit budget of Rs 5.47 trillion. And this has led to fiscal slippage concerns this year.

One must also note that in the last one decade, India is making serious efforts to reduce the fiscal deficit level. Ever since, the new government came in it has been in favor of fiscal consolidation and meet the long term fiscal deficit target of 3% by FY17-18. This will be the lowest target compared to the last couple of year.

That said, challenges remain in achieving the above stated target. The notebandi exercise resulted in a slowdown. Further, government announced flurry of projects but execution is still pending. This means the government needs to relax its spending to spurt the growth again.

This means, once again, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking it fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economic growth from the shock of demonetisation.

It is also worthwhile to note that creating economic growth by the government spending its way out of trouble, cannot continue indefinitely.

As Vivek Kaul writes in one of his recent editions of the Vivek Kaul's Diary... 'At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for.'

It would be interesting to see how the government tackles the above challenges. We'll keep you updated on the developments from this space.

From other news, Foreign portfolio investors (FPIs) have pulled out a massive Rs 73 billion (US$ 1.14 billion) from equities during December 1-22 from the country's stock markets this month so far. The outflow was primarily due to rising crude prices and widening fiscal deficit. However, they put in Rs 13.6 billion in the debt markets during the period under review.

Overall, FPIs have invested Rs 498.4 billion in equities so far in 2017 and another Rs 1.5 trillion in debt markets.

The major factor for FPIs going ahead would be to see growth coming back in the domestic economy, which has not yet picked up contrary to the expectation, the reports noted.

Nifty 50 Index Ends December Expiry 2.5% Up
Nifty 50 Index Ends December Expiry 2.5% Up

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

It was an exciting one for the Indian indices. At the start of the expiry, the bears had an upper hand where the index slipped to hit a low 10,033. Mid-expiry, the index recovered smartly to trade near 10,300 level.

The Gujarat and Himachal Pradesh election results brought in a sharp volatility, where the index gapped down 70 points and plunged to a low of 10,075. It acutely recovered on the same day to reach a high of 10,443. Post that, the index stabilised and traded with a positive bias to end the December series with 2.5% gains.

Last expiry, we mentioned that the 10,000 - 10,100 zone is an important support zone for the index. As a result, it triumphed from that level twice. Now the index has broken above its important resistance level of 10,500 (which will now act as a good support as per the change of polarity principle).

So does this mean that the index has resumed its upward graph after nearly three month of sideways trading?

The derivative and rollover data can give us some clue about this. You can look out for the detailed analysis on the derivatives data in today's Profit Hunter Pro newsletter (Subscription required).

COMMODITIES

Gold Hits One-Month High

Gold traded on a positive note during the week. After opening gap up on Tuesday, the yellow metal gradually traded up throughout the week. The buying was seen amid firm global trend. The commodity also edged up as US dollar weakened. Finally, on Friday, gold witnessed continued its up move and ended the weekly session with 1.76% gains.

Gold Trades in an Uptrend

Crude Oil Crossed Mid-2015 High

Crude oil traded on a strong note during the week. It opened the weekly session higher and traded strongly to close the session 2.5% gains. The buying interest was seen on back of an outlook for healthy demand amid ongoing production cuts led by OPEC and Russia. The Waha Oil Company pipeline explosion also led to optimism. The black commodity witnessed minor profit booking during the mid-week. But the up move continued on the final day of the week as well. It finally ended the weekly session 3% up.

Crude Oil Witnessed Buying Interest

CURRENCIES

Dollar Trades on a Negative Note

The dollar traded on a negative note during the week. It opened its session lower on Tuesday but recovered and traded positive until mid-week. It rose due to month-end demand for the American currency from importers and banks. The dollar witnessed selling pressure towards the end of the week hampered by a recent dip in US 10-year bond yields. Domestic stock markets finishing higher too bolstered the rupee sentiment. Finally, on Friday, the dollar witnessed some more selling and ended the weekly session 0.31% down.

Dollar Ends in the Red

Commodities 22nd Dec 29th Dec % Change
Gold/10 gms 28,653 29,156 1.76%
Silver/kg 37,954 39,237 3.38%
Crude Oil/barrel 3,737 3,850 3.02%
Natural Gas/mmBtu 170.60 189.70 11.20%
Currencies 22nd Dec 29th Dec % Change
USD / INR 64.26 64.06 -0.31%
EUR / INR 76.35 76.83 0.63%
GBP / INR 86.15 86.55 0.46%
JPY / INR 56.89 56.99 0.18%

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