Amid almost relentlessly gloomy data emerging from Japan, the country’s stock markets have been doing very nicely thank you. Only on Friday did Japanese stocks snap (by incremental amounts) their solid nine-day winning streak, with the Topix falling back just 0.3 per cent to 824.53 and the Nikkei 225 Stock Average slipping 0.1 per cent, to close at 8,626.97. For the week, however, the Nikkei gained 8.6 per cent, while the Topix ended up 7.8 per cent, the most since November 1997.
As KBC strategist Jonathan Allum noted in his daily newsletter, the Topix by Thursday had enjoyed its longest run of uninterrupted success since August 2004. But traders in Tokyo “seem happy to dismiss this as a government-inspired ramp for the end of the fiscal year,” he added, and “since this theory cannot be either verified or falsified it will be dismissed as meaningless by the methodologically scrupulous”.
Actually, traders in Tokyo have very good reasons for cynicism, given past official sleights of hand in the markets. In this case, though, we agree with Allum that trader paranoia is “hopelessly parochial, in that it ignores the strength exhibited by stock markets all over the world”. For this reason alone, says Allum:It beggars belief that the Japanese government, which would be generally expected to have problems organising a drinks party on premises where alcoholic beverages are produced, can co-ordinate a global bull market/bear market rally (delete according to level of personal grumpiness).
This new found strength in Japanese stock markets (which is “more impressive than it looks since many stocks went ex-dividend”, notes Allum) can be partly explained by better-than-expected data from the US, where both the major economic releases this week (durable goods and new home sales) exceeded expectations.
But before Japan hands get too excited (which we admit is highly unlikely) consider some other key factors. The country’s relentlessly bleak data just got a bit gloomier on Friday with the release of CPI figures showing the economy heading into a deflationary phase.
As Bloomberg reports Friday:Japan’s consumer prices stalled in February and retail sales tumbled the most in seven years, signaling a return to deflation is likely to deepen the recession. Prices excluding fresh food were unchanged from a year earlier, the statistics bureau said today in Tokyo. Retail sales declined 5.8 per cent, the Trade Ministry said, more than the 3 per cent economists predicted.
As Richard Jerram, Macquarie Securities’ chief Japan economist, noted, “Japan is back in deflation and the price level is set to decline for several years. Falling prices erode the health of the corporate sector and mean that the Bank of Japan cannot cut interest rates to appropriate levels.”
In Jerram’s view, the rapidly widening output gap suggests that deflation will worsen in coming months and persist for several years – that’s several years. The trough, he predicts, should come in the third quarter this year, when the headline CPI seems likely to be falling around 2 per cent year-on-year:
More worryingly for the stock market, he says:
Deflation will further erode the profitability of the corporate sector, as it cuts into sales, while some costs are less flexible. Similarly it damages the balance sheet, as the cost of debt is unchanged, while the value of assets falls. In turn this weakens the health of the financial system, although fortunately policy- makers appear to be alive to this risk.
The trouble, as we noted earlier this week, is that the banks are not responding.
Another key issue for the stock markets lies in the disclosure by the incoming chief executive of Mizuho Financial Group, Japan’s second-biggest bank, who told Bloomberg this week that the group intends to sell off a cool Y900bn ($9.2bn) of its equity holdings:“We still hold 2.9 trillion yen in stocks, which is one of our main problems,” Takashi Tsukamoto, who will become chief executive officer of Japan’s second-largest bank on April 1, said in an interview in Tokyo. “We want to reduce that number to under 2.5 trillion yen quickly, and then to 2 trillion yen.”
Losses on stock holdings have contributed to two straight quarterly deficits at Mizuho, forcing the bank to raise $4.4bn to repair its balance sheet, noted the report.
Like all its rivals, Mizuho’s retail banking unit owns stakes in a wide array of companies – 574 of them according to Bloomberg, while the corporate banking subsidiary’s investments cover 464 stocks, ranging from big companies such as Canon and Japan Airlines to lesser-known companies like Tokyo Rope Manufacturing and traditional theatre operator Kabuki-za.
A massive dumping of its holdings would, ironically, further erode the value of banks’ stock portfolios – not to mention the future direction of Japan’s currently nascent stock markets.
Related links:
Japan heads for deflation as retail sales tumble 5.8% - Bloomberg
Mizuho’s new chief targets $9.2bn cut in equity holdings – Bloomberg
Two views on Japan’s loose change – FT Alphaville