JP225/USD

The Japan 225 or Nikkei 225 began the third quarter with a selloff and continued a downward trajectory through most of July and August on widespread concerns around Japan's economic rebound following a spike in new covid-19 infections. Investors remained cautious as the Japanese government expanded the state of emergency to more regions in their attempt to contain the virus. After two months of losses, Japanese stocks began September with a bang. Japan 225 rose sharply over the first two weeks and breached the 30,600 resistance level on September 14, after Prime Minister Yoshihide Suga announced his plans to not run in the party leadership election. The Nikkei 225 exited September with 3.5% gains.

Japan’s unemployment rate unexpectedly fell to 2.8% in July, from 2.9% in June. This was the lowest jobless rate in three months, with the total number of unemployed persons falling to 1.90 million. Analysts project the jobless rate to rise again to 2.9% in August.

The au Jibun Bank services PMI for Japan climbed to 47.4 in September, from a 15-month low of 42.9 in the previous month, according to a preliminary reading. Despite the improvement, the latest reading still signalled contraction in the services sector for the twentieth straight month due to the spread of the Delta variant of covid-19. The final reading, due in October, is likely to be in-line with the preliminary estimate.

The Japanese economy expanded by 1.9% on an annualised basis in the second quarter, versus expectations of 1.3% growth. Economists expect the annual growth rate to slow to 1.2% in the third quarter.

The Bank of Japan held its key short-term interest rate at -0.1% at its September meeting. The central bank also maintained its target for the 10-year government bond yield. However, employment and income in the country remained weak amid the spread of the Delta variant. Analysts expect the central bank to keep rates unchanged at its October meeting.

Japan’s Tankan small business sentiment index improved to -7 in the second quarter, from -13 in the previous three-month period. The index is widely expected to decline again to a reading of -9 in the third quarter.

The next Japanese general election will be held in November. The country’s governing party has elected former foreign minister Fumio Kishida as its candidate of choice for the next prime minister. However, Kishida is as unpopular with the people as the departing prime minister.

Analysts on average expect Japanese stocks to continue climbing in the fourth quarter on strong corporate earnings and a faster rollout of covid-19 vaccines. Cyclical stocks have greater exposure to these tailwinds, as they are the main beneficiaries of an economic recovery.