David Fuller and Eoin Treacy's Comment of the Day
Category - Japan

    BOJ Maintains Stimulus as Inflation Lags Behind Growth

    This article by Toru Fujioka for Bloomberg may be of interest to subscribers. Here is a section:

    Governor Haruhiko Kuroda said at a press briefing that the central bank didn’t need to reconsider its current policy framework. 

    His comments last month on the "reversal rate” theory stoked speculation about an earlier policy exit. The theory posits that monetary stimulus could end up hurting commercial banks’ profitability, making them less likely to lend. 

    Kuroda said Thursday that financial intermediation hasn’t been impaired in Japan and that talk about the theory doesn’t indicate any need for policy change. The yen weakened following the comments and traded at 113.57 per dollar at 5:12 p.m. in Tokyo.

    "Just because I brought up this academic analysis, reversal rate, doesn’t mean at all that we need to review or change the yield curve control we’ve adopted since September last year,”

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    Nikkei Climbs to 26-Year High as Global Growth Optimism Returns

    This article by Min Jeong Lee and Emi Urabe for Bloomberg may be of interest to subscribers. Here it is in full:

    Japanese shares rose with the Nikkei 225 Stock Average advancing to its highest since 1992 on a weaker yen, as upbeat jobs data from world’s largest economy reignited optimism over global growth.

    Japan’s currency slid to a one-month low against the dollar after Labor Department figures Friday showed the U.S. added more jobs than expected in November and the unemployment rate held at an almost 17-year low. Both the Nikkei 225 and the broader Topix index advanced for a third day, with banks and machinery makers providing the biggest boost. Local equities are bouncing back to their highest levels in a quarter century following a pullback in late November on profit-taking.

    “The global economic expansion isn’t over yet,” said Tatsushi Maeno, a senior strategist with Okasan Asset Management in Tokyo . As the yen heads lower “investors will anticipate upward revisions to corporate profits ahead of the earnings season in March.”

    Both main stock gauges retreated briefly on Monday as technology companies slid in the wake of the sector’s recent global selloff. A measure of electronics makers finished 0.1 percent higher after slipping by as much as 0.6 percent.
    “Performance for semiconductor stocks like Tokyo Electron is sluggish with investors torn over whether it’s alright to take an optimal view on the sector again,” said Hideyuki Suzuki, a general manager at SBI Securities Co.

     

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    Stronger for Longer

    Thanks to a subscriber for this report from Morgan Stanley focusing on the outlook for 2018. Here is a section on Japan:

    On Target November 2017

    Thanks to Martin Spring for this edition of his letter. Here is a section Japan:

    “The MSCI Japan Index now trades on 15.1x 12-month forward earnings, or an 18 per cent discount to the MSCI USA Index’s 18.4x,” Wood reports. “It is also a major structural positive that earnings growth is increasingly coming from domestic-focused [rather than export-focused] corporates.” That means shares generally are less dependent on favourable moves in the yen-dollar exchange rate. 

    The worsening labour shortage should lead sooner or later to accelerating wages, boosting consumption. 
    “This dynamic has already been evident for some time in the case of temporary workers. But to the longstanding frustration of both the Abe government and the Bank of Japan, wage rises for permanent employees have remained minimal, primarily because the trade unions have been more concerned about keeping their employees “permanent”, since such permanent full-time staff, on average, still earn 1.8 [times] the hourly wage for part-time workers.”  

    Companies have been keeping a tight grip on pay increases – one reason why listed firms are enjoying record profits and sitting on record amounts of cash, even allowing for the effect of increasing share buybacks. 

    There is a long-term trend for Japanese companies to be more generous with their dividend payouts to shareholders. Back in 2004 the payout ratio (dividends as a proportion of earnings) for the Topix index was only 17 per cent. Now it’s up to 30 per cent.

     

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    Volatility Spikes as VIX Tops 2017 Average Amid Tax Uncertainty

    This article by Sarah Ponczek for Bloomberg may be of interest to subscribers. Here it is in full: 

    Volatility roared back into the U.S. equity market as fresh concern about the prospects for tax reform sent the Cboe VIX Index to its biggest surge since August.

    “In terms of how we see the world and the impact to our strategy, to the extent this reform causes some uncertainty, that could lead to a pickup in volatility,” said David Jilek, chief investment strategist for Gateway Investment Advisers. “But we don’t have any keen insights as to how the politics is going to play out.”

    In a year that’s been characterized by record calm, Thursday’s two-point intraday jump in the VIX was enough to push it above the average level for 2017. The gauge, which uses options-trading data to measure implied volatility of S&P 500 stocks, still sits below the bull-market average of 18.3.

    Major U.S. equity benchmarks slid from record levels, with losses widening after the Senate revealed that its tax plan would delay lowering the corporate rate until 2019.

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    Breakfast with Dave November 3rd 2017

    Thanks to a subscriber for this report by David Rosenberg at Gluskin Sheff which may be of interest. Here is a section:

    I would have to say that if there is a market that has broken out of a 25-year secular downtrend, and where the economic and political tailwinds are significant, it is in Japan. I get told all the time that Japan’s population is declining, but we are buying companies, not bodies, and the bottom line is that even with this declining population, earnings momentum is on the rise and profit margins in Japan are on an impressive expansion phase, and not nearly priced in, In fact, Japan is one of the few markets globally that is not trading at premium multiples relative to its history and is an under-owned market both globally and locally. 

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    Japan is the 'most under-owned stock market on the planet,' and David Rosenberg says buy it

    Thanks to a subscriber for this article from CNBC which may be of interest. Here is a section:

    "The one part of the world which looks very good to me right now, a great turnaround story that's under-owned, is Japan. The Nikkei is breaking out," said Rosenberg said Friday on CNBC's "Trading Nation."

    He added: "I think even a child could see that the 30-year secular downtrend has been broken over the course of the past couple of months."

    The Nikkei 225, Japan's benchmark stock index, has soared nearly ten percent over the past three months. It's now up 15-percent so far this year. But it's still about 56 percent way from its all-time high hit in 1990.

    According to Rosenberg, Japan has one of the few markets that isn't trading expensively to its historical price earnings ratio — noting "almost everybody else in the world is." 
     

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    World's Most Daring Monetary Experiment Powers on With Abe's Win

    This article by Enda Curran and Toru Fujioka for Bloomberg may be of interest to subscribers. Here is a section:

    "Globally, the BOJ’s continued policy accommodation should help cushion the blow from the Fed’s balance sheet normalization and the ECB’s expected tapering next year," said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. "The BOJ will not be able single-handedly to keep rates low everywhere, but its commitment to continued monetary accommodation should restrain any possible global yield rise."

    Indeed, a sharper divergence between its policy outlook and the rest of the developed world may aid the BOJ’s cause should the yen continue to weaken, helping to accelerate inflation by making imports pricier. The yen slumped to its weakest since July on Monday and shares moved higher as markets digested Abe’s landslide.

    Abe’s decisive win on Sunday will embolden supporters of Abenomics, the prime minister’s signature economic policies centered around monetary and fiscal policy accompanied by structural reforms. It also increases the likelihood of BOJ Governor Haruhiko Kuroda being reappointed when his term comes up in April, according to Bloomberg Intelligence analyst Yuki Masujima, meaning the central bank’s policy framework won’t change.

    Naohiko Baba, chief economist for Goldman Sachs in Japan, noted in a report on Monday that "the largest tangible result" of Abe’s commitment to the very ambitious inflation target has been to keep the yen weak and boost equities. The currency has declined more-than 20 percent since Abe took office in December 2012, while the Nikkei 225 Stock Average has roughly doubled.

     

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    Machine Learning in Finance

    Thanks to a subscriber for this how-to report from Deutsche Bank covering quantitative strategies and how they are applied to finance. Here is a section from the introduction:

    Machine learning is everywhere 
    “Machine learning” repeatedly appears in the news, from the game of go to autonomous cars: what can those algorithms do for us in finance? 

    Supervised learning and its pitfalls in finance 
    In this first report in the series, we focus on supervised learning and note that while machine learning is very relevant to us, there are dangerous pitfalls, sometimes specific to the type of data we deal with. In particular, we examine penalized regression (lasso and elastic net), decision trees, and boosting – we also mention, in passing, support vector machines and random forests. 

    Application to the Japanese equity market 
    To make things more concrete, we try to use those algorithms to combine the investment factors in our database in order to build a stock ranking system for the Japanese market; this shows the limitations and pitfalls of traditional machine learning practices in finance. 

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    Email of the day on recent trades

    I bought the Nikkei as it broke out of its range and it has been doing well on the back of an Abe victory which would lead to increased monetary spending and a lower yen, thus boosting the Nikkei.

    I have read that very frequently pre-Japanese elections, the market runs up as people look to buy shares in industries that have been targeted by politicians for help, but that on the day of the election the market usually corrects. A buy the rumour, sell the news scenario. I wondered your thoughts on this. I know you are long the Nikkei and wondered if this was a potential long-term or short- term position, or what the charts are saying?

    Also bought the US Tech 100 which broke out of its range but has been travelling sideways since it broke out and I wondered if that was not a good sign, since you usually talk about explosions waiting to happen either up or down. Best regards,

     

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