NIKKEI225 Industrial Production Beats Forecasts – Confirms BoJ Stance on Rates

Japanese industrial production and capacity utilization corroborate the central bank’s outlook for the economy and its forward guidance on rates.

Industrial Production YoY showed an increase in activity of 2.9% after last month’s decline of 7.9% and beat forecasts by 0.2%. Capacity Utilization also increased, beating forecasts of 0.9% to print at 2.5%.

The latest economic data seems to confirm the BoJ’s officials who have been stating that the economy is performing, and monetary policy needs to return to natural levels to fend off inflation.

The most recent central bank official to speak was Naoki Tamura, at a meeting with local business leaders in Okayama. His main statement was that central bank rate needs to increase to at least 1% by the second half of the fiscal year.

Japan’s fiscal year ends March 31^st, giving a short time frame to get the main interest rate to the official’s mentioned target. Yesterday was also the first time a BoJ policymaker actually stated a target rate.

The inflation target is 2% and inflation has been persistently above that level. I believe the central bank will be obliged to go well beyond that 1% target for interest rates.

Tamura also mentioned that according to the BoJ the neutral rate is 1%, meaning the interest rate that neither expands nor contracts the economy.

Technical View

The day chart above for the NIKKEI225 shows a market that is still in a bearish trend. Yesterday’s candle broke above the Ichimoku cloud, but the lagging line (yellow line) is still below the cloud. Technically this is still a bearish market.

Today’s candle is finding support on the cloud and the previous low of a dip in April of 36,675 (green line). Further down the market will find support on the previous resistance level of 33,837 (black line).

To the upside, the market will find resistance at 37,559 (red line), which corresponds to a previous dip. If that level breaks the next resistance is at 38,864 (blue line). To consider a possible return to a bullish trend, we would also need to see the lagging line above the cloud.