Shunning Japan gets riskier
TOKYO —
After 23 years of being the smelly wet dog of global markets Japan may be at a turning point.
With many massively, and understandably, short on Japan, the possibility that new policies actually work, or fail memorably, means investors are carrying considerable, and growing, risk. Now might be a prudent time to move closer to a benchmark allocation, which for most of us means putting money back in Japan.
A set of radical new fiscal and monetary policies being pushed by newly-minted Prime Minister Shinzo Abe might finally succeed in bringing inflation and growth back to Japan, but also could easily end in a financing or banking crisis.
Abe has advocated “unlimited” easing by the Bank of Japan, while at the same time going so far as to lay plans for the government to buy and lease back plants to troubled firms as a means of support and to spur capital investment.
Abe also advocates a weaker yen to make Japanese exporters more competitive. Global markets think he means business, driving down the yen’s value against the dollar by more than ten percent since mid-November, when his victory in elections first seemed secure.
That has been great for Japan’s exporter-heavy stock market, which has risen almost 20% since mid-November and 23% in 2012, its best year in seven.
Here is the key point to grasp: whether Abe is successful in rescuing Japan almost doesn’t matter. The radical new policies raise the chances of a big move in Japanese equities up or down, making the risks of being short or long greater.
If you can see the future, go ahead and go all-in or all-out. For the rest of us, it is probably a good time to lighten up our bets.
And our bets are almost certainly mostly one way. You are probably seriously underweight Japan, and let’s face it, you have had plenty of reason to be short.
Over the past year global fund managers have made their biggest negative bet an underweight on Japan shares, according to a survey by Merrill Lynch. And while Japan shares comprise 15% of global equity capitalization, individual investors too tend to be underweight, in part because they are simply under-diversified internationally, but also because Japan has appeared to be such a basket case.
CLEVER OR LUCKY?
So, whether you are clever or just lucky being light on Japan has worked out brilliantly, as it has been a toxic mixture of volatile and weak. After peaking just below 39,000 at the end of the bubble year of 1989 - yes 23 years ago - the Nikkei 225 index has been on a grinding trip lower, shedding investors as it fell, leaving it below 9,000 as recently as November.
Besides suffering from an aging population and sclerotic economy at home, Japan has really suffered since 2009 as an export-oriented economy with an overvalued currency, with the yen supported by safe-haven flows.
Abe’s mix of policy is remarkable, both in its boldness and in the risks it carries. He has pressed the BOJ to double its inflation target to 2% and to greatly expand its program of buying up government bonds. He has threatened to push through legislation impairing BOJ independence, a step he’s unlikely to be forced to take. Abe’s been explicit about wanting a lower yen, with other members of his cabinet shrugging off criticism from trading partners.
The new policy, in essence, is to force the yen lower, supporting exporters. That’s nominally bad for the value of Japanese stocks, which are of course denominated in yen, but a 5% or 10% hit to the yen will be far outweighed by the rush of profits if exports pick up.
That could keep the explosive rally of the past couple of months going.
If you are 20% underweight in a market that outperforms the rest of the world by 20 percentage points, you are going to have some explaining to do to your clients.
As well, looked at on a price-to-sales basis Japanese shares cost only a third of the U.S. peers, making them the cheapest in the developed world. But Tokyo stocks have been cheap for two decades, making the Nikkei the place where value investors go to die.
The downside is that, while the Japanese people are rich, its government is deeply in hock, with debt about 240% of gross domestic product, dwarfing that of the United States. There is a significant risk that Japanese bondholders sell up if Abe is actually successful in fanning even a little bit of inflation. That could lead to a damaging spike in inflation, a financing crisis or a banking crisis, as Japan’s banks, which ultimately the government must insure, own huge amounts of government debt.
Risk truly is two-way, and the chances of a big move seem large.
Putting money back to work, getting closer to a neutral allocation and cutting risk is probably the best play.
(c) Copyright Thomson Reuters 2013.
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10 Comments
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1
gaijinfo
These economically illiterate journalists sure are easy to brainwash. Radical policies? Since when is a case of Japanese "me too" money printing radical?
5
Kabukilover
The author calls Abe "newly-minted." In fact he is recycled. He was the PM before and quit suddenly because of a bad tummy. That he is back again with a dangerous right-wing agenda shows the LDP is party that is bankrupt as far as new ideas go. And however he wishes to present Abe as fresh and bold what Abe represents is the same old rubbish in a not particularly new package.
Let me take up one important point in this regard. Abe is planning to use our tax money " for the government to buy and lease back plants to troubled firms as a means of support and to spur capital investment." Bold indeed it is. It is also stupid. There are go reasons those plants and firms are "troubled." There is something fundamentally wrong with them. The plants may be outdated. The firms be selling products that no one wants or are made better elsewhere. Buying and leasing these plants to their derelict owners is not going to change anything. It will only make things financially worse for the rest of Japan. Mind you, this has nothing to do with firms like Seiko, Toyota or even Sony, who do not need their plants bought and leased back to them. These are no doubt minor concerns. The whole thing smells of pork. Pork was one big was the LDP won votes in the fat good old days. It is going to lead to disaster in these lean times.
The author writes the following: "Abe also advocates a weaker yen to make Japanese exporters more competitive. Global markets think he means business, driving down the yen’s value against the dollar by more than ten percent since mid-November, when his victory in elections first seemed secure." This is most likely fallacious reasoning--ergo hoc, ergo proctor hoc. It is very likely that what we have seen is good old market forces at work. These forces are complex and not simply contingent in the long run on who is elected to office.
The dollar has been on a steady spiral downward since the 1970s. It has had its ups and downs but the ups have consistently countered by down. The dollar and the Euro plunged to remarkably low levels recently. There are various political-economic reasons for this. The bottom line was that the dollar and the Euro were at bargain bin levels. I bought a lot of dollar and euros when the buying was good. Probably others people with more money than I had the same idea. A could at least partially account for the rise in those currencies. The sudden drop in the yen may show a lack of confidence in Abe. I really do not know and I doubt anyone else does either. The thing to remember, whatever the case, is that government intervention in generally only has short term influences on the money market. As I write the dollar is still below ¥90 and the euro is a ghost of its former overpriced self. Were this 1983 and not 2013 there would be a panic all around, like when the dollar dipped below ¥200 in 1978.
Abe in the long run will be seen as a disaster. He'll probably have another tummy ache.
2
philsandoz
"[r]adical new fiscal and monetary policies" from Abe and the LDP -- hee, hee, hee I can't actually remember who first said that the LDP is neither liberal, democratic or a party. Abe could only ever be radical if he was leading a party, not just a faction and, perhaps, if he had a gene transplant.
"Newly-minted Prime Minister" -- ho, ho, ho (He's already failed in that position once and only inherited his LDP role from his dad, anyway. Couldn't we just call him "one of Japan's shortest-serving prime ministers" out of the 34 holders of that position since WWII? To put this into contect, it compares with 14 prime ministers over the same period in the UK.
"[p]lans for the government to buy and lease back plants to troubled firms" -- ha, ha, ha, that is nothing but the old remedy of bailing out the totally inept and inefficient.
"[m]embers of his cabinet shrugging off criticism from trading partners" -- Guffaw, guffaw, guffaw. Does this writer really believe the bumf spread by the government that Japan can do just what it wants on an international scale without a care for what its trading partners think, say and do?
"[T]he downside is that, while the Japanese people are rich, its government is deeply in hock, with debt about 240% of gross domestic product" -- chortle, chortle, chortle. Finally, hidden away at the end, is a statement almost worthy of being called the truth, except, does the writer really think the Japanese people are rich? I suggest he strays a little away from Ginza, Marunouchi, Roppongi, Ebisu Garden Place, etc. (if he's ever been to Tokyo, or even Japan) and ask the thousands of homeless and millions of recently unemployed just how rich they are.
This kind of uninformed regurgitation of Japanese government handouts does a disservice not only to the worlds of finance and economics, but also to the once good name of journalism.
1
Kabukilover
More than the usual awful typos above. Had to rush. This is more of a footnote.
From all I can see, Abe has nothing that is new or worthwhile. This sums up Abe in his previous term. Unlike Koizumi, who did his bit to mess up Japanese society, he is not entertaining. Most of his agenda is based on taking care of the corporations, including TEPCO, and inciting ultranationalist passions so that Japan can feel good about itself. The 23 year old economic crisis is the LDP's doing. The remedy the injuries they have inflicted on Japanese society they are offering more of the same. More of the same includes a lot of pork. Pork in the old days won votes, putting off the attending problems to this generation. Today, in a lean time, pork is going to cut immediate problems.
Pork and ultranationalism are about all Abe and the LDP can offer. In the very near future Japanese voters are going to miss the DPJ, it many faults notwithstanding.
0
as_the_crow_flies
>
Pork and ultranationalism are about all Abe and the LDP can offer.
Well said!
And all I have to add in response to this piece is: Oink Oink.
-4
CrisGerSan
This article is long on clever smart sounding phrases and exudes a smug superior attitude that is quite shallow, tho flashy. In truth, Abe is showing both resolve and imagination and some of his proposals promise a lot of good for Japan and for investors who are far sighted enough to see the future of Japan as being better and better, A careful student of economics and world market trends knows that slow and steady wins the race and Japan has continued to improve of the years not by flashy and sudden forward lunges followed by disasterous flops as we have seen in most western nations but by steady and committed support of native industry, and manufacturing and constant improvement in both individual lives and the society as a whole. It is apparently not clear to some of the posters here and elsewhere, and certainly is not clear to the authour of this rather naive article, but it will be clear in time as Abe turns things around and moves ahead. I wish there were other leaders with the same insight and courage in other nations but currently we have a large flock of sheep blindly following other glib and clever sounding "experts" right over the cliffs of their own countries. But it is useful to see how wrong "popular" analysis can be. Slow and Steady, slow and steady.
2
Nessie
What the author and other analysts miss is that much of "Japanese" production is already done overseas. The weakening of the yen will make imports less attractive to Japanese, but it will only make exports more attractive for those products that are still actually made here in Japan.
(Just a quick thank you to JT for adding the bold/italic/quote/link functions. Very useful, and a great way to start the year.)
2
ebisen
This is where stopped reading this stupid article. For the writer's information, the economy of Japan and the Japanese yen has been the most stable in the developed world.
0
JeffLee
He has a point in that the hedge fund managers who have been shorting Japan all these years have been losing their proverbial shirts.
1
gokai_wo_maneku
We are supposed to take seriously a guy who calls Japan a "smelly wet dog"?
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