Marketmind: World market, political eyes turn to Japan

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

Japan takes center stage on Friday, with the April consumer price inflation report grabbing the data spotlight and the Group of Seven leaders summit in Hiroshima stealing the global political and economic limelight.

These events come amid rapidly improving international investor sentiment toward the world’s third-largest economy, reflected in Japanese stocks surging to their highest level in 33 years.

The broad index hit that milestone this week, and the came within 0.5% of reaching it on Thursday. One final push on Friday – a reasonable assumption given Wall Street’s gains on Thursday – and it will be a landmark day for Japan’s benchmark index.

The Nikkei is on a roll. Thursday’s 1.6% rise was its best day in two months, it is up 4% this week and on course for its best week since October, and a sixth straight weekly rise would mark its best run in five years.

As Phil Suttle, a former World Bank economist, wrote on Thursday: “Japan is back!”

Inflation in Japan is also back. After decades of fighting against deflation the Bank of Japan is facing the unfamiliar problem of sticky inflation, while at the same time insisting that it will stick with ultra-loose monetary policy. Something has to give.

Annual core CPI is expected to rise back to 3.4% from 3.1% in March, which would up the ante on the BOJ to start dismantling its ‘yield curve control’ policy sooner rather than later.

As the week draws to a close, the broader global market mood is one of optimism and bullishness – optimism that a U.S. debt default will be avoided and bullishness that markets can withstand the rise in bond yields sparked by the latest wave of hawkish Fed-speak.

Wall Street, Treasury yields, implied U.S. interest rates and the dollar all rose on Thursday.

G7 leaders begin a three-day summit in Hiroshima on Friday, with world market attention focused most on what they say about China.

The G7 is divided over China, with some countries grappling on how to warn against what they see as China’s threat to global supply chains and economic security without completely alienating a powerful and important trade partner.

Leaders will discuss concern about China’s use of “economic coercion” in its dealing overseas. Washington has proposed narrow restrictions on investment to China but that has not been universally welcomed.

The main G7 statement at the weekend is set to include “a section specific to China,” sources have told Reuters.

Here are three key developments that could provide more direction to markets on Friday:

– Japan CPI inflation (April)

– G7 leaders summit (Japan)

– Fed Chair Jerome Powell speaks

(By Jamie McGeever; editing by Deepa Babington)

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