Prime minister Abe's surprise apology to parliament earlier today regarding Japan's actions in World War II should help diffuse a row that has been brewing since Koizumi came to power. It is, in our view, mainly indicative of a fundamental shift in economic power in the region. The conciliatory gesture towards mainly China and South Korea reflects the growing dominance of those countries and their rising importance in terms of trading partners. Although it is unlikely to be enough, this is clearly a step in the right direction.
On a side note, today's disappointing home sales figures in the U.S. provides support for the Fed's decision to leave out any mention of "firming" at the last FOMC meeting and raises the probability of cuts later on this year. A neutral bias seems increasingly appropriate considering the housing conundrum and the typical 6 to 12 month lag for core CPI. The Fed will also be watching the employment figures very closely in coming days and weeks as the economic expansion takes an increasingly priority role.
