Machine Orders Reinforce a Hike by the BOJ ...

... or do they? If you ask the investors, of which most admittedly live in a quite different short term world than myself, a firm 76% according to Bloomberg believe that the BOJ will raise the rate this Thursday which will bring the rate up to 0.50% from the current 0.25% as it has been held ever since the BOJ ended ZIRP back in June 2006.

(From Bloomberg linked above)

The yen gained for a second day against the dollar after a report showed accelerating growth in machinery orders, boosting the Bank of Japan's case for raising interest rates.

Investors see a 76 percent chance the BOJ will increase borrowing costs this week, up from 66 percent on Jan. 12, according to Credit Suisse Group calculations. Rising rates may encourage Japanese investors to keep money at home and will make raising funds in yen to buy higher-yielding assets more expensive.

``Traders took a good look at the machinery orders data and are buying yen,'' said Osao Iizuka, head of foreign-exchange trading at Sumitomo Trust & Banking Co. in Tokyo. ``The numbers support speculation the BOJ will raise rates this week.''

My discourse on Japan should not be seen in a week to week perspective but in more long term perspective. As such, I think that we need to ask ourselves what an increase in machine orders mean at this stage and whether this increase in machine orders is driven by domestic or foreign demand? This is a very important question since one of the most vexing questions concerning the Japanese economy at the moment is the relationship and transmission dynamics between the corporate sector which exhibits strong momentum (i.e. the numbers today) and a domestic economy which does not seem to respond to the buyoant corporate and as such consumption and inflation continue to remain very low. What happens if the BOJ raises on the back of these perky business sentiments if the transimission mechanism is somewhat broken between the domestic economy and a highly competitive and efficient export sector.

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