Japan: PM Abe may be disappointed by the US withdrawal from TPP negotiations - BBH

Analysts at BBH notes that the Japan's Prime Minister Abe may be disappointed by the US withdrawal from TPP negotiations.  

Key Quotes

“However, he is probably happier with the Trump's Administration plans for increased military spending on top of the increase that had already been planned, as well as its tough line toward China.  The Japanese economy is being lifted by capex, industrial output, exports, and fiscal support.  After the recent capex report, many expect Japan's Q4 GDP will be revised from 0.2% to 0.4% (from 1.0% on an annualized basis to 1.6%).”

“Japan will also report its January current account.  Seasonal factors are dominant.  The current account and the trade balance always (without fail for 20 years) deteriorate in January compared with December (and always improve in February).  Remember, unlike Germany, Japan's trade balance does not drive the current account.  Investment income is typically larger than the trade surplus.”

“Japanese shares have underperformed at the start of 2017.  The Nikkei is up 1.8% and the Topix is up 2.6%.  The Nikkei trails other G7 markets this year, while the Topix edges ahead of Italy and Canada.  The 10-year bond yield has been above zero since the middle of last November.  It has been confined mostly to a three to 10 basis point range, with the BOJ deterring moves above the range.  After being challenged late last year, the BOJ has regained the upper hand.”

“The dollar-yen exchange rate remains strongly correlated to 10-year interest rate differentials.  The correlation is among the highest for the past 20 years.  With Japan's side of the spread fairly stable, the movement of the US 10-year yields drives the differential.  The correlation between dollar-yen and the two-year interest rate differential is not as strong as the 10-year.  At 0.65, it has hardly been surpassed over the past two decades.”