Our Global Investment Committee always seems to meet in the middle of great volatility, and this time was no exception, with the investment world facing all sorts of new challenges.
In our view, the LDP coalition's maintenance of a strong two-thirds majority in this election will greatly help Prime Minister Abe and his party's reform efforts, while likely bolstering Yen weakness to some degree.
The three main points from our prior report on this topic have not changed; however, there are a few more anomalies in the data this time.
With a slowdown in consumer demand following the April consumption tax hike, a second straight quarter of negative GDP growth in July-September, and unseasonably cold weather resulting in an even further drag on consumption, Japan appears to be only halfway through to achieving its goals of putting an end to deflation and reviving the economy.
Equity investors should not fret too much about weak macro data, as Japanese companies have been able to overcome such for nearly a decade through rationalization and improved corporate governance.
Moody's downgrade of Japan to A1 will likely have very little effect on bond yields, the economy or risk-asset psychology. The major reason why is due to its odd premise of predicting too much success of Abenomics, while most market observers are not so optimistic.
Three important things to know about the recently announced Japanese GDP statistics that indicated that the country was in a recession.
Amid the continued recovery in the U.S. economy and announcements of strong economic indicators, the Federal Reserve Board announced on 29 October its decision to discontinue its programme of asset purchasing and quantitative monetary easing.
Amid continued downward pressure on prices, the Bank of Japan (BOJ) decided to ratchet up its quantitative and qualitative easing program at its Monetary Policy Meeting on 31 October.
We have long reported on the role of the wealth effect, as its importance is vastly underestimated by local and foreign investors. The 2Q data for net financial assets shows a QoQ increase to a new historical high.
Update on Japan’s “Show me the Money” corporate governance — the dividend paid by TOPIX continues to rise towards its historic high, but the payout ratio has been stagnant for the past few months, as earnings continue to rally equally well.
Since the start of October, the Japanese stock market has shown weak performance. Heightened concerns over the worsening economic climates in Europe and China and less bullish forecasts on the U.S. economic recovery drove stocks in Europe and the U.S. sharply down, with the Japanese market following suit.
The currency markets in September saw a sharp weakening of the yen and strengthening of the U.S. dollar, with the yen starting the month trading at about 104 to the dollar, but weakening to about 109 by the end of the month.
The Japanese stock market made large gains starting from the end of 2012, but concerns over geopolitical risk in Ukraine and potential debt default in Argentina led to market sentiment weakening from the beginning of 2014.
Improving the number of independent directors and other governance issues are very important in the intermediate term for Japan, but it is crucial for investors to understand that much of the profitability message has already been understood by Japanese corporate for nearly a decade.
Japan’s pipeline inflation, which we measure using the recently renamed Producer Price Index’s Finished Consumer Goods for Domestic Demand sub-component continued to be quite depressed in August.
Japan’s 2Q GDP growth, at -7.1% QoQ SAAR, was far below June’s consensus of -3.1% (and our -2.5% estimate) and we need to reduce our CY14 forecast, but not by much and we remain more optimistic than consensus.
The US dollar has been gaining against the yen since mid-August and is currently trading at around ¥106, as the yen continues to weaken and the dollar strengthens.
As part of its growth strategy, the Japanese government has proposed strengthening corporate governance. The proposal aims to enhance the profitability of private sector firms and ultimately to improve the economic lot of the general population.
The Japanese market for IPOs is booming once again. Following the collapse of Lehman Brothers and the global financial crisis, the number of IPOs in Japan went into decline. However, after new listings hit bottom in 2009, they have gradually recovered, with increases in the number of IPOs in each of the last four years.