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

    Yen Jostles With Inflation as Trigger for More BOJ Stimulus

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

    Many economists including those at UBS Group AG and Mitsubishi UFJ Research and Consulting Co. retain the view that economic fundamentals remain the most likely trigger for the BOJ. Some also note, as the central bank itself has, that inflation will emerge as labor shortages propel wages higher.

    Until 2012, the yen was trading at about 80 to the dollar, weighing on profits for such companies as Toyota Motor Corp. and Honda Motor Co.

    Kuroda can’t afford to have Japan’s large companies cut their earnings forecasts as he has cited high business profits as a source of more investment and wage increases, said JPMorgan’s Kanno.
    Large manufacturers expected the yen to be 117.39 on average for the year through March, taking it close to potential trigger levels suggested by some economists. The median of market forecasts compiled by Bloomberg is for the yen to be at 122 at the end of this quarter.

    Economists were almost evenly split on the likelihood of more stimulus before the Oct. 30 meeting at which Kuroda and his policy board stood pat. When the BOJ last increased its asset purchase program in October 2014, only three of 32 analysts surveyed by Bloomberg forecast the move.

     

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    Toyota Maps Out Decline of Conventionally Fueled Cars

    This article by Yoko Kubota for the Wall Street Journal may be of interest to subscribers. Here is a section: 

    Yet for now, Toyota is still highly reliant on gasoline- and diesel-powered cars. Last year, around 14% of Toyota’s global sales were hybrid vehicles, including plug-ins. Most of the remaining sales were vehicles powered by gasoline and some diesel, though a detailed breakdown wasn’t available.

    Toyota has posted record profits in recent years, partly thanks to growing sales of profitable but gas-guzzling sport-utility vehicles and pickup trucks in the U.S., backed by lower fuel prices.

    The vision to eliminate gasoline- and diesel-powered cars was a part of Toyota’s wider green car strategy unveiled Wednesday.

    By 2020, Toyota aims to cut carbon-dioxide emissions from new vehicles by more than 22% compared with its 2010 global average. It ultimately hopes to take that to a 90% reduction by 2050, the auto maker said.

    To do so, Toyota plans to sell roughly 7 million gas-electric hybrid vehicles world-wide over the next five years, it said. Toyota has sold around 8 million hybrids since it started selling them 18 years ago.

    Toyota also plans to sell at least 30,000 fuel-cell vehicles a year world-wide by around 2020, it said.

     

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    Nikkei 7.7% surge biggest one-day gain in 7 years

    This article by Peter Wells for the Financial Times may be of interest to subscribers. Here is a section: 

    Analysts in Tokyo said the sharp rise in Japanese markets reflected the low closing level on Tuesday and a large amount of short covering.

    “The background is a rise in Chinese shares yesterday, which spread to Europe and the US, then back to Japan,” said Mr Motomura, who noted that Nikkei 225 futures had already rallied above 18,000 in Chicago before the Japanese market opened.

    Tomohiro Okawa, Japan equities strategist at UBS in Tokyo, said the market had been behaving strangely since the previous day. “I don’t think there’s a big change in trend,” he said.

    The Shanghai Composite closed 2.3 per cent higher, while the tech-heavy Shenzhen Composite added 3.3 per cent. Hong Kong’s Hang Seng rose 4.1 per cent for its biggest one-day gain since December 1 2011.

    Elsewhere around the region, Australia’s S&P/ASX 200 added 2.1 per cent for its third-best day of the year, Korea’s Kospi gained 3 per cent for its best day since December 21 2011 and Taiwan’s Taiex jumped 3.6 per cent for its second-best day of 2015.

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    Last dance

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section: 

    Bubbles always come in different forms 
    With the big cliff of April 2017 in sight, enjoy the last party like a driver careening to the cliff's brink. Japan is now painted in a completely optimistic light, with the pessimism which permeated Japan after the Great East Japan Earthquake in 2011 forgotten and expectations for the 2020 Tokyo Olympics riding high. The bank lending balance to the real estate sector is at a record high, and we expect bubble-like conditions in the real estate market to heighten due to increased investment in real estate to save on inheritance taxes. History repeats itself, but always in a slightly different form. We have no choice but to dance while the dance music continues to play. 

    Japan heading towards its fourth bubble 
    Japan has seen three bubble-like rises in real estate prices; in the early 1970s, the late 1980s, and the mid 2000s. We are now jumping into a fourth bubble. The three preconditions needed for a real estate bubble are: 1) a plausible scenario that supports the bubble, 2) more aggressive bank lending to the real estate sector, and 3) tax reforms that boost real estate prices. We believe that current conditions neatly meet these requirements: 1) a plausible scenario – although we see no reason to believe that everything will be fine until the Tokyo Olympics, it sounds plausible on the surface; 2) record-high bank lending to the real estate sector; and 3) widespread real estate investment to save on inheritance taxes which were raised.  

    We currently have no choice but to continue dancing
    The Japan Revitalization Strategy, announced as the government's new growth strategy, includes many policies which push Abenomics' bedrock philosophy of survival of the fittest, and thus Japan's globalization seems right around the corner. As a result the middle class will likely be greatly segmented, with the gap between the rich and poor widening. An increase in high-networth individuals will boost savings, which will keep interest rates declining. This will likely push up real estate prices as many investors seek higher yields. Moreover, Japan's promotion of English language education is also likely to increase Japanese real estate investment by overseas high-net-worth individuals. It is uncertain whether these strategies will prove successful. However, the party music is currently high and loud in Japan and we can only continue to dance – even though we know it would be the last dance.

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    Japan Banks Seen Reporting Gains in Fees, Overseas Lending

    This article by Gareth Allan and Shingo Kawamoto for Bloomberg may be of interest to subscribers. Here is a section: 

    Prime Minister Shinzo Abe’s efforts to stimulate the economy through monetary easing helped to spur bank lending while also lowering borrowing costs. Loans at city banks have risen for 2 1/2 years, according to the Bank of Japan. The average interest rate on new loans was 0.801 percent in
    May, close to a record-low 0.767 percent last August, BOJ data show.

    “While domestic lending grew in the first quarter, tighter loan spreads will constrain profit growth,” Yasuhiro Sato, chairman of the Japanese Bankers Association, said at a news briefing on July 16. He expects overseas lending to keep expanding and doesn’t see any change in the direction of interest margins yet.

    Overseas Expansion
    Sato is also chief executive officer of Mizuho, which said this year that it’s buying North American loans from Royal Bank of Scotland Group Plc for $3.5 billion. Sumitomo Mitsui last month agreed to purchase General Electric Co.’s European buyout- lending unit for about $2.2 billion. Mitsubishi UFJ’s main lending arm is considering acquiring a bank in Indonesia, the Philippines or India, Asia-Pacific CEO Go Watanabe said in an interview last month.

     

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    Uniqlo Parent Forecasts Slower Japan Sales on Cool Summer

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

    Same-store sales in Japan dipped 12 percent in June as the cooler weather curbed demand for summer clothes, the company said earlier this month.

    Net income surged 36 percent in the three months ended May to 27.6 billion yen, based on nine-month figures the company released Thursday in Tokyo. Sales gained 23 percent to 398.4 billion yen in the quarter.

    Investors have bet billionaire Tadashi Yanai’s clothing retailer, which offers basic designs made with advanced materials at low prices, will grow by exporting its model to faster-growing markets like China and the U.S.

    The shares trade at about 41 times projected earnings, compared with about 31 times for Inditex, which sells Zara casual clothes and is Uniqlo’s bigger global rival and 24 times for Hennes & Mauritz AB, which retails the H&M brand.

     

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    Finally! The yen breaks 30-year support, a new round of currency turmoil begins

    Thanks to a subscriber for this report by Albert Edwards for SocGen which may be of interest. Here is a section: 

    Why is China’s lurch into deflation on the GDP deflator, but not the CPI measure, so important? We have pointed out before (unfortunately we don’t have space for the chart here) that in Japan during the 1990s the thing to watch to see the havoc that deflation was wreaking on nominal revenues and debt/income loads was not the CPI, but rather the GDP deflator, which fell far faster than the CPI. Economic agents produce far more than just consumer goods and services and the GDP deflator is a much wider basket of goods and services and includes exports and investment goods. Clearly the descent into outright GDP deflation in China explains the more aggressive, even slightly panicky, policy easing measures there.

    We also pointed out last week that China’s move into BoP deficit imposes a substantial monetary headwind on the economy. China may wish to keep the renminbi stable at this time while the IMF is currently considering including it in the SDR currency basket. But the economy is simply not in a position to withstand a major yen decline bringing down the currencies of its competitors in the region (and the additional deflationary impulse). I remain convinced that China must start guiding its currency down against the dollar and it can do that easily now it has a BoP deficit by doing absolutely nothing (ie not intervening any longer to hold it up)! China will also take the IMF’s recent declaration that the renminbi is no longer undervalued as justification for these actions - link.

    Worrisome deflation is already being imported into the US, especially from Japan (see chart below). China (blue line) has yet to participate, but a further round of Asian devaluations will inevitably see waves of deflation heading westwards – as in 1997/98. Watch this data closely.

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