Japanese economic data bond wars and lithium investments

Japan’s industrial production numbers disappointed again today, with output down 1.3% from July when it dropped by 1%. The decline compared with market consensus estimates of around 0.5%. It wasn’t all bad news though, retail sales grew by 1.8% according to a separate government report. The seasonally adjusted jobless rate printed at 4.2% compared to market estimates of 4.3%. The jobs-to-applicants ratio was unchanged in August compared to July. There is one big issue holding back the competitiveness of the Japanese export sector – the stubborn appreciation of the yen against the dollar. Despite numerous rounds of attempted intervention the dollar yen continues to trade between 77-78, last trading at 77.52.

China to dump Japanese bonds?

One of the most interesting comments to emerge this week from the Japan China border dispute came from an official of the Chinese Academy of International Trade. The premises of his comments was that China is in a strong position to dump its holdings of Japanese bonds, driving down their price and driving up the yields on Japan’s market rates. China currently holds around US$230bn of Japanese bonds – the largest international creditor. In reality though, most of Japan’s government debt is held by its own citizens – around 95% of total outstanding issuance.

City Index believes the size of the Chinese holding is probably something the BOJ can absorb through its own purchases and in fact any dumping, which puts pressure on the yen, will be welcomed by Japan’s exporters by driving down the yen’s value relative to the dollar. The backlash from such a drastic action will see Japanese foreign investment into China dry up, something China’s planners won’t want at all at this sensitive economic time. It’s a catch twenty two situation which doesn’t benefit either economy. Dollar yen near post-war highs doesn’t suggest the market sees the dumping of Japanese bonds in the immediate future.

In a prior note titled “Is the Chinese growth story over?” – we mentioned the importance of foreign direct investment from foreign multinationals into emerging provinces like Hunan as second tier cities pick up the growth slack from fatigued coastal hubs. Japanese foreign direct investment into China was estimated at around 628 billion yen in 2010. Japan was the second largest provider of outward foreign direct investment globally behind the United States in 2011. France was third. China needs Japanese foreign direct investment and Japan needs China’s emerging investor base as a market to sell its bonds as its population matures. Both of these are medium-long term requirements, so in the short term the rhetoric and war of words is likely to continue until another global problem emerges and takes over the headlines.

Japan bankrolls Argentine boron project

While most of the focus has been on the China and Japan territorial dispute this week, some corporate news caught our eye. Australian listed mining company Orocobre (ORE) this week acquired another project in Argentina, separate to its existing lithium prospects, which has attracted Toyota Tshusho as an equity partner and Mizuho financing. The new project adds exposure to boron minerals, which complements the existing lithium developments. Orocobre expects to produce around 17,500 tonnes of lithium carbonate per annum which is an increase on its initial 16,400 feasibility estimate. While China threatens Japan with supply limitations of rare earths, Japanese companies are actively seeking to grow their own exposures in rare metals like lithium which will become an important part of the electric car manufacturing process.

Watch this space closely!