Asian Markets Weekly Roundup: Solid China GDP and Weak Yen Boost Sentiments

Asian markets advanced this week, as improved indicators from world's second largest economy and a weak yen boosted sentiments in the region.

Japan's Nikkei average index added one percent this week, while Australia's S&P/ASX rose 1.3 percent. China's Shanghai Composite Index increased 3.3 percent. Hong Kong's Hang Seng gained 1.5 percent. South Korea's KOSPI eased 0.4 percent.

China's fourth-quarter economic rebound after seven straight quarters of slowdown lifted the hopes of global economic recovery and cheered the financial markets. Although the country was widely expected to register strong figures after a third quarter slowdown, the 7.9 rate reported by the National Bureau of Statistics beat analysts' expectations. Chinese industrial output and retail sales figures released in the week too remained positive.

However, analysts opine that Chinese recovery is solely dependent on the single engine of investment and that the government needs to take up further measures to sustain the positive results.

"A look at the detail raises doubts about durability of the Chinese rebound," said Mark Williams, economist at Capital Economics.

"Last quarter's turnaround was driven by investment, particularly in real estate, which looks unlikely to last given that developers continue to report increases in their stocks of unsold property".

Japanese market sentiments continued to remain steady as the yen extended its weak run against its peers, on hopes that the government and the Bank of Japan (BoJ) will initiate stimulus measures to aid Japan's lagging economy. BoJ officials are set to meet for a policy review early next week and analysts expect the central bank to raise inflation targets to the government recommended two percent mark, along with boosting asset purchase scheme - its major monetary easing tool.

The central bank could resort to US Federal Reserve -style open ended bond and other asset purchase that could ensure that inflation levels reach the targets, according to a Reuters report.

This could be a major turning point in BoJ's policy stand, which has so far been rather conventional.

Though these measures are expected to cheer the financial markets and send the stocks soaring, analysts warn that in the longer term, Japan needs structural fiscal reforms that back stimulus measures. A weak yen is perceived positive for export oriented firms, but it could also result in increased import expenses.

US economic concerns made a comeback with debt ceiling deadlock fears, barely two weeks after the country's lawmakers managed to seal a deal to avoid the fiscal crisis. This week, Washington looked set for fresh political wrangling after Obama said that he will not negotiate the spending cuts plan in exchange for raising the borrowing costs. The Republicans have demanded that raising the debt cap should be accompanied by deep spending cuts.

A failure to raise the debt ceiling could see the world's largest economy default on its debts. US Federal Reserve Chairman Ben Bernanke and Treasury secretary Tim Geithner have urged lawmakers to avoid such a situation at all costs.

Meanwhile the World Bank slashed its global economic outlook for 2013, citing mainly the US political uncertainty over fiscal debates. The lender said that although the world has put the worst of the recent financial woes behind, a recovery seems difficult due to the issues in high income economies.

The Week Ahead

US new home sales figures and Markit manufacturing Purchasing Managers Index (PMI) report are set for release in the coming week, which could throw light on conditions in the housing and industrial sector in the recent weeks. Markit's eurozone flash PMI is also expected to be released, along with German ZEW and IFO survey figures.

Preliminary China PMI figures are also expected from HSBC next week. Although the fourth quarter GDP remained strong, traders will be wary on speculations that infrastructural spending has remained weak in the final months of the year.

But the major focus will be Bank of Japan's policy meet set for 21 and 22 January, which could mark a turning point in the central bank's policy stand. A strong fiscal stimulus plan from BoJ could further boost sentiments and boost the Nikkei further.