Japanese exports and orders disappoint (again)

Emily Nicol
Chris Scicluna

Having been somewhat upset yesterday by bad Apple news, most Asian equity markets regained their poise today to chalk up gains. For example, despite another weak Japanese trade report and very poor machine orders data too (see more on these below), the TOPIX closed up 0.4% as the yen depreciated back through ¥110/$. The improved risk appetite also saw stocks in Hong Kong and Taiwan make respectable gains, while those in Korea edged higher, and US stock futures rose too. But while they were buoyed for a while by reports of possible additional measures by the authorities to support firms affected by the coronavirus (today’s reports centred on the airline industry), China’s stock indices lost ground in the afternoon session, with the CSI300 eventually closing down 0.15% on the day.

The bond markets, however, were largely characterised by a lack of direction, e.g. with USTs oscillating broadly sideways (10Y yields are currently little changed from yesterday’s close at 1.56%). JGBs were a touch weaker (10Y yields back up about 1½bps to -0.05%), however. But ACGBs were little changed following some mixed Australian labour market data and a very downbeat report on the country’s agriculture sector (more on these figures below too). European bond markets have opened a touch weaker, ahead of this morning’s UK inflation data. 

With Japan’s economy having contracted by a steeper-than-expected 1.6%Q/Q in Q4 – the second-sharpest drop since the Global Financial Crisis – today’s data suggested no improvement in conditions heading into the New Year.

Certainly, the goods trade report for January implied a notably weaker export performance at the start of the year, with the value of exports down a sizeable 3.7%M/M, the most in eight months, to the lowest level since November 2016. Admittedly, the year-on-year decline in exports (-2.6%Y/Y) was less than had been expected and the smallest since July, nevertheless still marking the fourteenth consecutive drop.

The improvement in the annual rate of growth in part reflected an easing in the pace of decline in shipments to the US (by more than 7ppts to -7.7%Y/Y, despite still weak shipments of autos) and EU (by more than 6ppts to -1.9%Y/Y). In contrast, but perhaps unsurprisingly, the value of exports to China fell sharply in January, by more than 7ppts to -6.4%Y/Y. Of course, to what extent this reflects disruption to demand due to the timing of the Lunar New Year is difficult to decipher. Shipments to South Korea, meanwhile, continued to decline at a double-digit pace.

When adjusting for price and seasonal effects, the BoJ’s figures implied an even weaker trade performance in January, with export volumes down 4.6%M/M, the most for almost five years. So while there was also a sizeable drop in import volumes that month (-2.9%M/M), today’s figures suggest that net trade was a drag on GDP growth at the start of the year. And with the outbreak of the coronavirus having caused significant disruption to activity across Asia this month, external demand for Japanese goods look set to remain weak throughout Q1.

Travel restrictions now in place will also take their toll on Japan’s services exports over coming months too. Nevertheless, overseas visitor numbers published today suggested that the number of arrivals from China rose 23%Y/Y to 925k in January, accounting for more than one third of the total. Visitors from Hong Kong (up 42%Y/Y) and Taiwan (up 19%Y/Y) accounted for a further 25%. However, given a further notable decline in visitors from Korea (-59%Y/Y), a trend that has been in place since the escalation of the spat between the two countries intensified last summer, this left total overseas arrivals down more than 1%Y/Y at 2.66mn.

Meanwhile, after Monday’s GDP release reported a marked decline in non-residential investment in Q4 – the 3½%Q/Q drop was the steepest for five quarters – today’s machine orders data disappointingly implied ongoing weakness in capex growth in the first quarter of 2020 too. In particular, private sector core orders fell a much steeper-than-expected 12½%M/M in December, the most for fifteen months, caused by a more-than 21%MM drop in orders placed by non-manufacturers. In contrast, orders placed by manufacturers rose (4.3%M/M) by the most in five months.

Of course, orders figures are notoriously volatile. And the slump at the end of last year followed a surge in November (18%M/M). This notwithstanding, core orders were still down more than 2%Q/Q over the fourth quarter as a whole, the fourth quarterly decline out of the past five. And the Cabinet Office forecasts a further notable fall (5.2%Q/Q) in orders in Q1 too, which would leave them at their lowest for 4½ years.

Today’s figures from Australia’s labour market were rather mixed. The latest wages data were disappointing, suggesting that income growth remained relatively subdued at the end of 2019. In particular, wage growth moderated 0.3ppt in Q4 to 0.5%Q/Q. That left the annual rate unchanged at the five-quarter low of 2.2%Y/Y reached in Q3, and hence still well below the rates around 3-4%Y/Y that will be required to shift inflation back to target on a sustained basis. Private sector wages rose 0.5%Q/Q and 2.2%Y/Y, while public sector wages rose 0.4%Q/Q and 2.2%Y/Y. The latest job vacancy data, however, pointed to increased activity in the labour market at the start of the year. In particular, in January, the Internet Vacancy Index rose 0.7%, the most in more than two years. Nevertheless, that left it still down 7.5%Y/Y, highlighting the loss of momentum seen over the course of 2019.

Separately, the impact of Australia’s ongoing drought on economic conditions – a factor regularly cited by the RBA as a contributor to Australia’s persistent sub-potential rate of GDP growth – appears to be even more severe than previously thought. The latest quarterly Crop Report from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) suggests that the area of land planted for summer crops this season dropped a whopping 66%Y/Y, representing a downwards revision of 33% from the forecast published in December. The sharply lower estimate reflects the fact that conditions in December are now judged to have been much worse than originally anticipated, with the substantial rains from late January through to mid-February judged largely to have arrived too late to allow for additional planting of summer crops.

Given the more limited planting area, total summer crop production is now similarly forecast to fall 66%Y/Y this year, compared to the drop of just 5%Y/Y seen in last year’s winter crop production. In its most recent forecasts, the RBA estimated that the decline in agricultural output could knock 0.25ppt off overall GDP growth of 2¼% in 2020. The updated ABARES report, however, now suggests that it could subtract an additional 0.1ppt from growth on top of that.

Euro area:
This morning will bring euro area construction output figures for December. Given the weakness already reported in Germany (-8.7%M/M) and France (-2.7%M/M), these are expected to show a marked drop in euro area activity at the end of the last year, to leave output in the sector down in Q4 and compared with a year earlier. Wednesday will also bring euro area balance of payments figures for December.

The key UK release today will be January’s CPI figures, which are expected to show that headline inflation increased 0.3ppt from December’s near-three-year low of 1.3%Y/Y on the back of higher energy inflation. The upwards drift in core inflation will, however, be more modest. This morning will also bring the official ONS house price data for December, which are likely to report a further modest pickup at the end of last year, to the strongest year-on-year growth for more than a year.

In the US, meanwhile, today will bring housing starts and PPI figures for January, as well as the minutes from the Fed’s January FOMC meeting.


Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.