Japan’s Coincident Index rose to 118.5 in May, up from 118.1 in the prior month. The move points to a modest improvement in current economic conditions as captured by the composite measure.
The latest reading extends the index’s upward drift, with May marking a 0.4-point increase from April. Coming off 118.1, the index now stands at 118.5, indicating a slightly stronger alignment of coincident indicators than in the previous month.
Implications For Japanese Equities
We view the rise in Japan’s Coincident Index for May as a confirmation of steady economic expansion. This reinforces the underlying strength in the Japanese economy, which is a positive signal for corporate profitability. This data supports a bullish stance on Japanese equities for the coming weeks.
Given this economic backdrop, we are looking at derivatives on the Nikkei 225. The index has already climbed over 4% in the last month, and this solid data could provide the momentum to break through the key 40,000 resistance level. We are considering buying call options that would profit from such a move.
Impact On The Yen And Monetary Policy Outlook
This economic strength also has significant implications for the yen. With Japan’s core inflation for June holding firm at 2.6%, pressure is mounting on the Bank of Japan to move away from its ultra-loose monetary policy. A stronger economy makes a policy shift more likely, which would strengthen the yen.
Consequently, we are positioning for a potential drop in the USD/JPY currency pair. The market is currently pricing in a wide divergence between US and Japanese interest rates, but this could narrow quickly on any hawkish hints from the central bank. We are therefore adding put options on USD/JPY to prepare for a stronger yen.
