The latest Japanese sentiment surveys took a surprise turn lower today. The Tankan survey, which covers most if not all of Japanese largest corporations, published dismal readings earlier this morning. Q1 Manufacturing index came in at -8, lower than expected while Non-Manufacturing Index came in at 6, lower than expected 8. Outlook of companies from both manufacturing and non-manufacturing were lower, coming in at -1 and 9 respectively. Despite the disappointment, all 4 data were still much better than previous quarter, telling us that Abenomics is having a positive impact on sentiment, just that the impact perhaps is less than what we are expecting.
However, the same cannot be said for capital expenditures. Capex of all industries shrank by 2% Q/Q, versus an estimated 5.0% and sharply lower than 6.8% growth in Q4. Perhaps seasonality should be taken into consideration, as Q1 2013 is essentially the closing quarter for most if not all Japanese firms, and we shouldn’t have expected a huge uptick in capital expenditure when firms tend to review and consolidate all their assets during closing season. Nonetheless, capex remains a strong indicator of expansionary intention by corporations, and it is strange to see the divergence between lesser business expansionary actions versus stronger sentiments about their business outlook.
Market seems to be picking this up as well, with stocks trading sharply lower. Price pushed towards the 12,350 floor in quick fashion, which provided some interim support. The extent of current bearishness can be felt post midday trade in Japan – prices accelerated lower in the final few hours of trade, instead of slowing down as volume and volatility tended to peak during the early opening few hours. Stochastic readings echoed the same, with readings appearing to bottom out during midday, only to see further acceleration lower shortly after, with both Stoch and Signal lines pointing lower instead of higher.
From the daily chart, price is facing a sterner test ahead with the 12,200 support. Price has broken back into the rising channel that encompasses the first 2 months of trading in 2013, and a test of lower channel is contingent to bears’ ability to break the aforementioned level. Stoch readings have came down dramatically from recent highs, and is below recent lows back in Jan. Current readings are still a fair distance away from the Oversold region, suggesting that a breakout below 12,200 will not face support as long as the indicator is concerned.
With BOJ decision coming up on Thursday, all eyes will be on Kuroda as he delivers the first punch of his “bold monetary action” for 2013. A failure to please markets will result in stock prices unraveling 2013 gains thus far easily, which could be the impetus needed for the potential breakout below 12,200. On the other hand, if Kuroda manage to truly surprise market with a plan/policy that is simply out of this world, we could also easily see price breaking back up above Channel Top and swing high above 12,700 which may lead the way for further gains in near future.
To provide a fair rounded view, the fall in capex may not be cause for concern, as latest employment data is showing higher hiring rates for graduates in recent months. Financial firms are also hiring more people to beef up their operations, and the reduce in capex could simply be a change in focus/strategy by companies to streamline their operations to favor higher percentage of human resources to drive growth. Time will tell whether that is true or perhaps the simpler explanation that Firms aren’t being truthful about what they say to surveys may apply here.
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