US$ Strengthening

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Deflation persists in Japan.  Consumer prices, (ex fresh food) declined by -0.2% in January Y/Y, the 3rd consecutive monthly decline, though in line with expectations. Its going to be far more difficult to generate inflation in Japan, after 15 years of deflation. Mr Kuroda will have to ramp up BoJ bond purchases far more than analysts expect. His1st BoJ policy meeting will be held on 3/4th April. Japanese businesses are reluctant to increase wages, which will limit the scope to increase inflation, also implying that BoJ policy will have to ease far more than currently expected. His 1st actions will have to be seen to be a success to generate the necessary momentum to weaken the Yen, in particular. I have started to short the Yen against the US$ positions again, albeit relatively slowly.

There are some signs that Japanese businesses are beginning to invest. Capex, excluding software, rose by +0.9% in Q4, Q/Q on a seasonally adjusted basis, the 1st increase in 4 quarters. The unemployment rate fell to 4.2%, whilst household spending rose by +2.4% Y/Y.

Japanese investments in US securities rose to US$1.84 trn at the end of June 2012, up from US$1.59 trn a year earlier. Japanese investors bought US$227bn of US government debt during the 12 months to June 2012. The holdings of US securities exceeds those held by China, which amounted to US$1.59 trn, though China remains the largest buyer of US Treasuries. Some of the holdings attributed to the UK may actually be Chinese holdings, as the Chinese do use London for some of their trades. (Source Bloomberg).

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