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Japan elections – implications for JPY?

JPY: There now appear to be 3 candidates running in the election (due Sep 29) for the presidency of Japan’s LDP with the winner set to become Japan’s next PM - Taro Kono, Fumio Kishida and Sanae Takaichi. Relevant for JPY is the outlook for monetary and (especially) fiscal policy under each candidate.      

  • Taro Kono - In his press briefing on September 10, Kono talks about restarting Japan’s nuclear power plants. His views on economic policies though tends to be abstract, leaning more towards micro than macro. On macroeconomic policy, his only reference is towards preferential measures for corporate taxes for companies that lift labor’s share of value-add. Overall, Kono looks to represent more of a continuation of ex-PM Suga’s government than Abenomics which may dampen enthusiasm for Japanese stocks and may lead to more positive sentiment in JPY (as a safe haven flow).     

  • Fumio Kishida – seems more pro-Abenomics but wants to correct the widening disparities caused by Abenomics. Such measures would include restructuring the environment for Japanese public companies where shareholders and managers are currently seen having a monopoly on the proceeds of growth towards sharing the rewards with employees, local communities, and other stakeholders. Such a move though would mark a shift away from Abenomics and could potentially dampen rather than boost sentiment in Japanese stocks which may encourage a bid in Yen (on safe haven flows). Kishida’s views on fiscal policy are also mixed. On the one hand, he would opt for a more expansionary fiscal stance than Kono when drafting additional economic measures in autumn while in a press conference on September 8, he indicates that “finances are the basis of a country’s credibility and I will not waver in my pursuit of fiscal reconstruction.” However, Citi analysts believe that the LDP as a whole is likely to have more influence on Kishida administration’s policies than just Kishida himself which means a platform closer to Abenomics. Overall, this is likely positive for Japanese stocks/ negative JPY at the margin.   

  • Sanae Takaichi: Abenomics continuity - she shares ex-PM Abe’s conservative views and her economic policy ideas seem to have a strong element of continuity with Abenomics (much more so than Kishida) which she herself refers to this as the “new Abenomics”. Her economic policy has 3 pillars – (1) a further sharp easing in monetary policy, (2) strategic fiscal stimulus confined to emergency situations, and (3) bold investment in crisis management and growth (investing in areas such as semiconductors and AI to promote growth as well as disaster response). She also favors putting primary fiscal balances at the national and regional level into the black on hold until the 2% inflation target is reached. A more aggressive expansionary fiscal stance and radical monetary easing likely calls for a sharply weaker Yen.  


Data releases overnight

  • USD: US CPI inflation – transitory weakness after transitory strength?  US core CPI inflation comes in weaker than expected in August, increasing just 0.10% relative to Citi analysts’ expectation for 0.24%MoM and consensus at 0.3%MoM. This leaves the Y/Y core reading at 4.0%, down from 4.3% and relative to 4.2% expected. Shelter prices, aside from hotels, though are solid, with owner’s equivalent rent up .25%MoM and direct rents up 0.31%MoM. But despite the weaker-than-expected 0.10%MoM core CPI reading, Citi analysts continue to see signs that inflationary pressure will be more persistent than Fed officials or markets expect and the reading should have little bearing on Fed officials’ decision making around tapering of asset purchases. In particular, shelter prices are a key source of upside risk given the rise in house prices and normalization of rents in cities and  the solid readings on direct and imputed rents are at least consistent with underlying inflation that is around target. Elements of PPI and CPI suggest a solid 0.26%MoM and 3.6%YoY core PCE reading for August, to be released October 1 (after the September 22nd FOMC).  
  • GBP: UK labor market continues to rebound but slack remains - UK labor market shows continued signs of a strong rebound in the three months to July with LFS employment printing at 183k (Consensus 199k, Citi 147k) and is now only down 750k from pre-pandemic levels. Labor demand remains very strong in the three months to August with vacancies on a three-month basis above 1 million for the first time on record. Meanwhile, LFS unemployment prints in line with consensus at 4.6% (Consensus 4.6%, Citi 4.5%) but broader measures of labor market slack remain elevated, with inactivity still 600k above Jan-20 levels. Alongside higher headline unemployment and higher rates of inactivity, recent BICs data suggest around 1.3 million workers remained at least partially furloughed in the month of August. As a result, Citi analysts think any narrative of a full ‘employment recovery’ should be treated with caution for now.  
  • AUD: Business conditions have held up in August despite the lockdowns; all eyes set on reopening - despite ongoing lockdowns, Australian business confidence and conditions improve. At -5 points, business confidence remains in negative territory but the August result is a small gain on July’s -7 points due to an accelerated vaccine rollout. Meanwhile, business conditions expand from +10 to +14 points. The result is encouraging with confidence and measures of business conditions far better than during the peak lockdown period last year. However, near-term indicators for employment weaken, easing from 11 to 9 points. Keep an eye on inflation - debate around inflation has subsided following the lockdowns across Q3 and unlikely to return this year. However, if inflation pressures do arise in the near-term, it will likely be in the form of supply-side issues that have been prevalent globally. Overall, despite the drop in economic activity, inflation risks remain skewed to the upside.    


Week Ahead         

  • USD: University of Michigan Consumer Sentiment – Citi: 73.9, median: 72.0, prior: 70.3; University of Michigan Inflation Expectations 1y – Citi: 4.7%, median: NA, prior: 4.6% - Citi analysts expect a moderate rebound in the University of Michigan consumer sentiment index to 73.9 in September after a sharp drop in confidence to 70.3 in August sparked by concerns of a renewed slowdown in activity. The drop in sentiment is likely in part related to elevated prices of many consumer goods. Inflation expectations components of the University of Michigan survey will also continue to be particularly important for the outlook for inflation. Citi analysts expect the 1-year ahead measure to rise slightly back to 4.7% although the 5-10 year expectations will be more important for the Fed         

  • USD: US August Retail Sales – Citi: -1.4%, median: -0.8%, prior: -1.1%; Retail Sales ex Auto – Citi: 0.1%, median: -0.2%, prior: -0.4%; Retail Sales ex Auto, Gas – Citi: 0.2%, median: -0.3%, prior: -0.7%; Retail Sales Control Group – Citi: 0.2%, median: -0.2%, prior: -1.0% - total retail sales should decline by -1.4%MoM in August with weakness led by auto sales while control group sales should fall -0.2% after a 1% decline in July. Over coming months, the team expects a further pullback in the very-elevated level of goods spending as services continue to normalize.  

  • NZD: NZ Q2 GDP Citi QoQ forecast; 1.0%, Previous; 1.6%; Citi YoY forecast; 15.9%, Previous; 2.4% - strong contribution from the construction sector thanks to the hot housing market is expected to continue driving the solid growth momentum in NZ in Q2. Elsewhere, consumption will remain a key driver of growth, and services-orientated industries are likely to benefit from improved sentiment as the economy was open across Q2. Overall, the solid growth trajectory of NZ’s economy prior to lockdowns should confirm that the RBNZ will probably maintain its hawkish rhetoric in the near term. However, Citi analysts still believe that the odds of a sharp tightening cycle are still low and the team only pencils in a 25bps rate hike in October.  

  • AUD: Australian August Labor Force Survey; Citi employment change forecast;-175k, Previous; +2.2k, Citi unemployment rate forecast; 5.1%, Previous; 4.6%, Citi participation rate change forecast; 65.4%, Previous; 66.0% - the reference period for the August Labor Force Survey will encapsulate the lockdowns across NSW and VIC. Consequently, job growth is expected to decline significantly across the two states. Discounting the noisy monthly data, the two metrics more relevant for the state of the labor market are the number of hours worked across the economy, and the number of people employed but working less or zero hours for economic reasons.  Citi analysts expect the unemployment rate to peak at around 5.4% later in the year as the economy reopens.  

  • CAD: Canadian CPI NSA MoM (Aug) - Citi: 0.1%, median: 0.1%, prior: 0.6%; CPI YoY – Citi: 4.0%, median: 3.9%, prior: 3.7% - Citi analysts  expect a 0.1% increase in headline CPI in August following a strong 0.6% jump in July. While this would be a more moderate increase in prices, it would be relatively stronger than the usual non-seasonally-adjusted price declines that typically happen in H2. However, a number of survey measures, including inflation expectations and the share of firms indicating difficulty meeting demand, suggest upside risks for core CPI. This may make BoC increasingly uncomfortable with a number of months of elevated core inflation. 

  • CNH: China August Retail Sales (%YoY): Citi 4.0, Consensus 7.0, Prior 8.5 - retail sales growth might have decelerated to around 4%YoY in August. The Delta variant outbreak and the resultant tighter prevention measures should have affected auto sales and broader offline sales as well as catering revenue. As a result, Citi analysts expect a visibly weaker underlying momentum of retail growth. 

  • CNH: China August Industrial Production (%YoY): Citi 5.8, Consensus 5.8, Previous 6.4 - IP might grow 5.8%YoY in August — PMI index of production edged down by -0.1pp to 50.9 in August though still a solid print despite disruptions from Delta and flooding in some parts of China as well as continued shortage of chips.

  • CNH: China August Fixed Assets Ex Rural YTD (%YoY): Citi 9.1, Consensus 9.1, Previous 10.3 - FAI growth might post 9.1%YoY Ytd in August — despite unfavorable weather conditions, PMI gained 3ppts to 60.5 for construction in August, likely supported by an infrastructure investment recovery. The industrial capex upcycle should still be continuing but property investment might have cooled off further as curb measures exerted their impact.   


This is an extract from the Daily Currency Update, dated September 15, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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