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

    Japan GDP Grows 2.2%, Longest Growth Streak in 11 Years; Asian Stocks Slide

    This article by Robert Guy for Barron’s may be of interest to subscribers. Here is a section quoting Barclays:

    The 0.5% q/q growth in Q1 reflected positive contributions from both net exports (0.1pp) and domestic demand (0.4pp). Notably, the heavily weighted private consumption component increased 0.4% q/q, resulting in the large contribution for domestic demand. This reflected an upturn in spending on semi-durables, together with the recovery in durables since last year. Private consumption was also up for services, but down for non-durables. That said, the strength of consumption in the Q1 GDP data may largely reflect an upswing in demand-side data and slightly overstate the underlying trend, setting the stage for a slowdown in Q2.

    In other areas of domestic demand, private capex increased 0.2% q/q (Q4: 1.9%), a second consecutive gain. Also, housing investment rose 0.7% q/q, sustaining positive growth. Meanwhile, public fixed capital formation (public investment) fell 0.1% q/q in Q1 (Q4: -3.0%), a third consecutive decline. However, we expect such investment to turn positive in Q2 as the effects of the FY16 second supplementary budget materialize. At the same time, real exports increased 2.1% q/q and real imports rose 1.4% q/q. For real exports, this marked a third consecutive quarter of growth (Q3 16: 1.9%; Q4 16: 3.4%). This reflects the ongoing recovery in demand from overseas, especially Asia.

     

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    Kuroda Confident Can Raise Wages, Prices "Significantly"

    This note by Chua Baizhen Bloomberg may be of interest to subscribers. Here it is in full:

    “The mindset is still quite cautious about inflation expectations, but I’m quite sure that with continuous accommodative monetary policy, supported by fiscal policy, we’d be able to eventually raise wages and prices significantly,”

    CNBC cites BOJ Governor Haruhiko Kuroda in interview.

    * Projected growth rate of 1.5% “not great” but it’s well above medium-term potential growth rate

    * Means output gap to shrink and become positive while labor market continues to tighten

    * Wages, prices would eventually rise to achieve 2% inflation target around fiscal 2018

    * Yield curve control “has been functioning quite well”

    * 10-yr JGB target should, for the time being, be maintained around 0%

    * Acknowledges that “headline inflation has been quite slow to adjust upward” in part because of weakness in oil prices

     

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    Can the Synchronous Recovery Last?

    Thanks to a subscriber for this report from Morgan Stanley which has a number of interesting nuggets. Here is a section:

    For the first time since 2010, the global economy is enjoying a synchronous recovery (see chart). The developed markets’ (DM) private sector is exiting deleveraging after several years of slow growth due to a focus on balance sheet repair and, after four years of adjustment, the emerging markets are in a recovery mode. These trends create a positive feedback loop. Indeed, the DM economies account for 60% of emerging market (EM) exports, so as their real import growth accelerates, EM exports are rebounding. What’s more, an improving EM outlook reduces DM disinflationary pressures. 

    How sustainable is this recovery? Typically business cycles end with macrostability risks (price, external and financial) spiking, forcing policymakers to tighten monetary and/or fiscal policy. In this cycle, considering that emerging markets inflation and current account balances are moving toward their central banks’ comfort zones, it is unlikely that macrostability risks will surface soon. Moreover, the emerging markets now have high levels of real rate differentials vis-àvis the US, providing adequate buffers against normalization of the Federal 

    DEVELOPED MARKET RISK. In our view, the key risk to the global cycle is apt to come from the developed markets— most likely the US, considering that it is most advanced in the business cycle. Moreover, the US tends to have an outsized influence on the global cycle, particularly the emerging markets. While price stability features prominently in debating the monetary policy stance of any central bank, financial stability is clearly emerging as an equally important factor.

    How will it play it out? For insight, we can look at history. The late ’60s saw fiscal expansion at a time of strong growth and low unemployment. In the mid ’80s, the US pursued expansionary fiscal and protectionist policies in an improving economy. We look at similarities and differences versus today, analyzing asset class performance by fiscal deficit and unemployment quartiles.

    To that end, private-sector leverage has picked up modestly in the US. In fact, the household-sector balance sheet, which was the epicenter of the credit crisis, had been deleveraging until 2016’s third quarter. Moreover, the regulatory environment has been relatively credit-restrictive. Hence, we see moderate risk to financial stability. However, risks could rise, considering that monetary policy is still accommodative, and particularly so if the administration eases financial regulations. Price stability is a critical risk, too—especially since the core Personal Consumption Expenditures Index inflation rate is close to the Fed’s target and US unemployment is around the rate below which inflation could accelerate. Reflecting this, we expect the Fed to hike rates six times by year-end 2018 (see page 3). We expect other major DM central banks to take a less dovish/more hawkish stance

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    Email of the day on Japanese equity index composition

    I wonder if you could please analyse why the historic charts of Japan's main equity market are so divergent? 

    As you know, the Tokyo market reached its "bubble era" peak in Jan. 1990 at 38,564 but has since recovered to around 19,063. 

    The Topix bank index peaked at the same time at 1,480 but is still languishing at a fraction of that level, 182.64 today. 

    The Topix 2nd Section index on the other hand is now at an all-time high from its peak of 4,500 reached in 1990 to approaching 6,000. 

    Normally the banks are the lead indicator but Japan's banks underwent immense restructuring so I can understand why they have languished but the discrepancy between these charts seems huge.

     

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    The World's Most Radical Experiment in Monetary Policy Isn't Working

    This article by John Lyons and Miho Inada for the Wall Street Journal may be of interest. Here is a section:

    Automobile, beer and cosmetics firms have slashed young-adult advertising and market to retirees instead, says Yohei Harada, head of the youth-marketing unit at Tokyo advertising agency Hakuhodo Inc. “The role of parents and children is getting reversed, where the parents from the bubble generation still act like children and want to buy the fancy car, while their children in the post-bubble generation worry about their parents’ spending,” he says.

    Takashi Saito, a 33-year-old unmarried entrepreneur, was living in group apartment in Tokyo in 2015 when he decided to start a business. His idea: an online clothing-rental company for women who want a varied wardrobe but don’t want to pay for it. For $45 a month, clients rent three articles of clothing at a time, which they can return for others when they like.

    Mr. Saito thought it would be easy to get a loan because Japan’s low-rate policies are meant to spur banks to lend more to small businesses. It wasn’t.

    He asked Japan Finance Corp., a state-owned institution set up to lend to small businesses, for $200,000. After much haggling, he got less than $50,000. A year later, as the business grew, he asked for more. He was rejected. Japan Finance Corp. declined to comment.

    Bank analysts say Japanese lenders have become more conservative, particularly with startup companies that have no collateral, because low rates cut into profits. In the 11-months after Japan’s rates went negative last year, Japan Finance Corp.’s loan portfolio shrank. 

     

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    Japan's manufacturing sector hasn't looked this good in years

    Thanks to a subscriber for this article by David Scutt for Business Insider. Here is a section: 

    Output, new orders, new export orders, stock purchases and employment all grew at a faster pace than they did in January.

    As lead indicators, the strength in new orders — both at home and abroad — bodes well for activity levels in the months ahead.

    An increase in order backlogs, along with a faster decline in inventory levels, also points to a strengthening in activity levels.

    “Encouragingly, with backlogs of work accumulating for the first time in 14 months, the added pressures on capacity should ensure growth will be maintained at a solid pace during at least the first half of this year,” said Samuel Agass, an economist at IHS Markit.

    “Subsequently, business confidence was at a survey-high.”

    That’s good news, and suggests the positive momentum in the global economy may have continued after a strong start to the year.

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    On Target Japan

    Thank to Martin Spring for this edition of his ever interesting newsletter. Here is a section on Japan: 

    Dividends are “being raised relentlessly,” says Price Value Partners? Tim Price. Incredibly, some international analysts say Japan is now an equity income play, after decades when its companies were notorious for neglecting their shareholders.

    Whereas “the balance sheets of US companies are groaning with years of accumulated debt, Japanese balance sheets are now the strongest in the world,”

    Tim says. Stock buybacks are now accelerating, and unlike the US, where buybacks are “debt-fuelled,” those in Japan are funded out of cash. John Seagrim of CLSA says: “The deep value opportunities in Japan are almost endless,” with 1.480 listed companies trading below their tangible book values.

    For the first time in years, the Japanese stock market now has strong domestic support. Jeffrey Gundlach says the government is encouraging it via three sources of “pretty much automatic buying” at an annual rate in excess of 5 per cent of total market capitalization. The central bank is buying ¥6 trillion (about $53 billion) worth of equities every year, corporate Japan is investing about the same amount, the state pension fund ¥5 trillion, private investors about ¥4 trillion.

     

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    Japan sees start of bull run, focus on Trumponomics and 'America first' policy approach

    Thanks to a subscriber for this report by Kazuhiro Miyake for Daiwa Securities which may be of interest. Here is a section:

     

    As for exchange rates, which are important for Japanese stocks, US long-term interest rates warrant attention. If the 10-year Treasury yield rises to 3%, we think the yen will depreciate to Y120-125/$. In this case, expectations for the Bank of Japan (BOJ) to change its monetary policy framework would probably emerge. We forecast Japanese corporate earnings will recover sharply from 2H FY16 and significant upgrades to consensus earnings estimates are likely, due in part to yen depreciation. With free cash flow to equity expanding rapidly, shareholder payout capacity should increase.

    Outlook for Japanese stocks: Against the backdrop of interest rates starting to increase worldwide in July 2016 and US long-term interest rates and the dollar rising since Mr. Trump’s victory in the presidential election, global investors have been shifting funds from bonds to equities and taking a more positive stance toward Japanese stocks. We think funds will flow into the Japanese stock market. Assuming Y115/$, we forecast TOPIX EPS of 94 for FY16, 108 for FY17, and 120 for FY18. Based on this, we expect the Nikkei Stock Average to reach 21,000-21,500 by end-2017. If the yen weakens to Y120/$, we forecast the index to be around 22,500.

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    Abe Faces Challenges to Follow Trump With Fiscal Spending Burst

    This article by Connor Cislo and Maiko Takahashi for Bloomberg may be of interest to subscribers. Here is a section:

    A third supplementary budget is on the drawing board to reconcile current-year spending and revenue figures, according to government officials familiar with the talks who asked not to be named per ministry policy. As to whether it goes beyond being a clerical package and takes on stimulus measures, that’s a function of what happens with politics, they said.

    A policy shift at the Bank of Japan and doubts about how much more Abe will accomplish in structural reforms is likely to increase pressure for a fiscal fillip.

    "We can’t put any more pressure on monetary policy, so the government will have to do more with fiscal spending," according to Koya Miyamae, an economist at SMBC Nikko Securities Inc.

    Yet tax revenue for the 12 months ending March 31 is likely to be lower than originally expected, as economic growth has been weaker than initially forecast, and government debt is already about 2.5 times the size of the economy.

    Japan’s budget deficit was 5.8 percent of gross domestic product in 2014, compared with 3.9 percent in the U.S.

    Asked about the need for another stimulus package this fiscal year, LDP Secretary General Toshihiro Nikai said last month it was "one option," according to Kyodo News.

    Trump has indicated he’ll spend $550 billion on infrastructure, with his plans forecast to add more than $5 trillion in debt.

    Satoshi Fujii, an adviser to Japan’s Cabinet Office, advocates looking at more fiscal stimulus as part of efforts to escape deflation. He said in a telephone interview on Nov. 11 that a third extra budget this year and a large initial budget next fiscal year may help Japan "fit very well with Trump’s policies."

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