Asia: Nikkei falls despite BoJ confidence, analysts worry of recession

As the Bank of Japan announced no changes to its policy decisions or view of the economy, despite the country entering a technical recession, major Asian indices closed lower on Wednesday.

Nikkei closed down 0.32% on Wednesday, in line with falls on Hong Kong's Hang Seng and the Shanghai Stock Exchange's composite index.

With the yen slipping to a new seven-year low and despite the positive lead from the US and upbeat local and Chinese business data, Wednesday saw traders run out of steam somewhat after the flurry earlier in the week as Prime Minister Shinzo Abe called a snap election and delayed a planned hike to the sales tax until 2017.

The Nikkei had rallied slightly following Abe’s announcements, but after some reflection there was less positivity.

Some domestic analysts were on Wednesday predicting the election will lead to a slowdown in spending that will deepen Japan's recession.

The previous general election two years ago "acted as a drag on personal consumption" and "some forecasters are predicting similar effects this time around, although higher winter bonuses and Abe's move to delay an increase in the consumption tax may lessen the pain", according to the Nikkei Asian Review.

A note from the Centre for Economics and Business Research also said it saw the snap election doing more harm than good to Japan's economy, but said the combination of monetary easing by the BoJ and the proposed postponing of fiscal tightening by Abe "are welcome news for an economy that is battling with external disinflationary pressures and weak domestic demand. But they will not be enough to bring Japan back to a stable growth trajectory."

The BoJ's November Statement on monetary policy reiterated its commitment to step up its operations of quantitative and qualitative monetary easing by an 8-1 majority vote and presented a moderate tone on the economy, highlighting weaknesses on the demand side, but still seeing the "economy recovering as a trend" and it also expects the economy to continue to "recover moderately".

"Much like Draghi’s comments earlier in the week, BoJ Governor Kuroda provided a reassuring if insubstantial conference this morning, stating that the Bank’s quantitative easing program was having the desired effect, whilst placed the responsibility for fiscal discipline firmly on the government," said analyst Connor Campbell at Spreadex.

Craig Erlam at Alpari UK added: "Given that the BoJ got in there early last month, it was always unlikely that we were going to see further bond purchases announced this morning."

He also said he felt "too much is being made" of the technical recession, as a similar phenomenon occurred the last time the sales tax was raised, "it's only natural in a low growth economy where the consumer makes up around 60% of GDP".

Japan's traders also appeared uninterested by solid readings for Japan All Industry Activity and a jump in China’s MNI Business Sentiment Indicator.

Japan all industry activity rose 1% in September from a month ago, when it showed no change, thanks to a rebound in industrial production, data from the the Ministry of Economy, Trade and Industry revealed. Industrial output advanced 2.9%, recovering from a 1.9% fall seen in August.

November's Chinese business indicator rose to 55.2 in October from its previous 51.7.

A likely further fall in Japan’s currency could prompt policymakers in the rest of Asia to try to weaken their own in an effort to maintain their competitiveness, but Mark Williams, chief Asia economist at Capital Economics, said he didn't expect a wave of competitive devaluations across the region despite his forecast that the yen is set to "slump by a further 17% or so against the dollar by the end of next year".

Elsewhere, China and Russia agreed to strengthen military co-operation and hold joint naval exercises to counter US influence in the Asia-Pacific region, according to media reports warning of a looming “new cold war”.