It has been a very bad week for stocks and (LDP) politicians in Japan. Commentators might still be excited over the landslide election that ended the LDP’s multi-decade hold on power and ushered in the opposition DPJ last Sunday. But Japan’s stock markets ended their the first historic post-LDP week with the proverbial whimper.
On Friday, reports Bloomberg, Japanese stocks fell to the lowest in more than a month. In fact, in the five days since the election, the Nikkei 225 stock average has fallen 3.3 per cent, and the Topix 3.5 per cent for its biggest decline in eight weeks.
The slide is really more about renewed fears over Japanese corporate earnings and economic indicators than anything to do with doubts about a new DPJ government, according to analysts. Regardless of the reasons, some commentators have had a field day.
KBC Japan strategist Jonathan Allum, in his sassy newsletter The Blah! on Friday picked up on Bloomberg reports on Credit Suisse notes on Japanese stocks this week.
The first Bloomberg report, on Tuesday, headlined “Japan stocks preferred by Credit Suisse” said: “Japanese equities were boosted to the top overweight region globally by Credit Suisse Group AG’s chief strategist Andrew Garthwaite, as the nation should see the biggest benefit from a pick-up in global growth”.
The second, headlined “Credit Suisse says Japan’s stock rally is over, ‘take profits‘”, said: “A six-month rally in Japanese stocks is over and investors should “take profits” as a better-than-expected reading on US manufacturing failed to lift markets, according to Credit Suisse Group AG”.
Perhaps, observes Allum, “the good folk at Credit Suisse Group AG can be forgiven for their apparent confusion (as Ralph Waldo Emerson once observed, a foolish consistency is the hobgoblin of little minds)”. He continues:
Japanese stocks were supposed to rise after the DPJ election victory while JGBs, spooked by the potential cost of the party’s commitments, were supposed to come under pressure. Of course, the exact opposite has occurred and the long sequence in which the TOPIX index has never fallen for two consecutive days, dating back to [former PM] Mr Aso’s announcement of the Diet dissolution on the 13th July, has been broken.
With Dr [Yukio] Hatoyama and his pals mulling over the formation of a new administration and not an economic release in sight, there is very little to move the market. If it has ignored the sharp rebound in Chinese shares it is probably wise — this is a market far too volatile for its own good and one which is certainly not to be trusted (in either direction).
Perhaps, concludes Allum, ” investors in Japan can shake off their persistent parochialism and engage in the global debate about the shape of the economic recovery”.
As for strategy, CLSA’s Christopher Wood in his latest Greed & Fear newsletter, says that the “obvious allocation in a Japanese equity context as a result of the DPJ win is an allocation to small caps”.
On the macro issues, Wood notes:…the DPJ policy if implemented is yen positive, most particularly as the party favours normalisation of interest rates to meet the needs of savers. This bias would help counter the long-term threat to the yen raised by Japan’s rapidly declining savings rate, a function of the country’s demographics, and its surging government debt to GDP ratio.
The key issue however remains execution, Wood warns.
For if the DPJ implements its spending programmes, without making any cuts, then the Japanese public sector debt profile becomes ever scarier. This in turn potentially threatens the ability to sustain demand for Japanese government bonds at current yields. In this respect investors should note that the Ministry of Finance, like an experienced conductor of an orchestra, has been the key player in ensuring that demand for JGBs is sustained from various government related buyers….
In that sense the arrival in power of the DPJ has the potential to send tremors that could potentially have negative implications for the long-established self-financing system in the JGB market. But equally if the DPJ can really crack down on public sector pork, there is the potential for the fiscal position to be put on a healthier sustainable basis.
For now, he advises, investors should “keep an open mind and see what happens – or does not happen”.
Related links:
The yen, Greed & Fear and the Britney factor - FT Alphaville
Japan votes to swim with the current of history, Jonathan Allum – The Times
Japan emerges from recession – FT
Japanese economy – Lex