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rffrydr
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 Posted: Fri Mar 03, 2006 12:25 am Post subject: JAPAN |
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Core rate up .5%; 3 in a row:
"Mitsubishi UFJ Securities senior strategist Naomi Hasegawa said remarks this morning by Prime Minister Junichi Koizumi fueled conjecture that the central bank will soon end its present policy.
'[Changes in] consumer prices are coming in above zero and we are seeing signs of getting out of deflation,' Koizumi told a parliamentary committee.
His comments were his most positive yet on recent indications that the economy is winning its battle with falling consumer prices. Previously, Koizumi had insisted that it was too soon to say that the economy was coming out of deflation."
Bonds and stocks were short going in. End-of-day showed resiliency, (complaceny?)
Hey Henry, Devil's advocate: with Japanese debt at a Godzilla-sized 160% GDP on the worlds fastest aging population (and most afraid of foreign workers) do they have any choice BUT to reflate their way out? And politicians want a decade for "reforms."
An end to quantiative easing may be announced at the end of Japanese Fiscal Year--but this could take a long, long time to play out. Markets 1st "verdict."
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HenryTo
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| Posted: Sun Sep 02, 2007 12:59 am Post subject: |
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A somewhat different view on the Japanese economy - but he still thinks the Yen should go down. Courtesy of Barron's:
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Japan on the Mend: Still a Haven?
Richard Jerram, Japan Economist, Macquarie Securities
By LESLIE P. NORTON
AS AN ECONOMIST SPECIALIZING IN JAPAN, Richard Jerram arrived in Tokyo in 1987, at the time of the Great Bubble. There, with a timeout for a Ph.D. from the London School of Economics, he watched the country go through its long decline and recent revival. We phoned Jerram in Tokyo at Macquarie Securities to catch up on what the July 29 Upper House rout means for Prime Minister Shinzo Abe and for global investors, and whether Japan, sometimes viewed as a haven, really is one. For Jerram's views, read on.
Barron's: Could you brief us on the July 29 election? What are the implications?
Jerram: The government did very poorly. It no longer has a majority in the Upper House, so it's going to be very hard for it to get things done. Technically, they can bludgeon bills though the Upper House because they've got a two-thirds majority in the Lower House. But clearly you don't want to bully the Upper House into pushing bills through too frequently. If the government spends critical capital, it won't be in economic areas, it's going to be in things more related to international relations or possibly domestic educational policies. It seems a reasonably good bet that just about nothing will happen on the economic front over the next couple of years.
What had people expected?
My view was that the Abe administration had no interest in economics. But there was an argument that once this election was out of the way, you'd see the real reformist coming out of Abe, which always seemed far-fetched to me. Whereas in Japan, it's been very, very difficult to sell reform, in the last couple of years. there's a growing sense of concern about inequality. The low probability of reform just got smaller. To push up support for the next election in a couple of years, the [ruling Liberal Democrat Party] needs to push up its traditional rural support base, which implies continued agricultural protection or increased rural spending -- more bridges to nowhere. So for the short term, possibly nothing happens or something that's not very positive.
How about the longer term?
It does seem the public, after putting up with 15 years of dreadful policy management, is starting to express some dissatisfaction. Look at the economy -- the crisis is over and there are more jobs than people looking for jobs. The banks are solid. Deflation is pretty much over. Land prices have stopped falling. Despite that, the government took a hammering in the polls. If you do get a general election in the next couple of years, you actually have a reasonable chance of the LDP losing power. People assume the opposition is such a rainbow coalition that it will fall before the next election, and if the opposition does manage to stick together, then they can easily win. It's still the same problem: There's not a great enthusiasm for pro-market reform, and the central opinion is a social-democrat type of reform. But policies will be very fluid because of the broad spectrum of opinion. So it could get really interesting.
Meaning woes for investors?
Interesting, meaning unpredictable. But they haven't had to give serious thought yet to their policy positions because they've been condemned to permanent opposition.
What does the market want to see?
Top of the list is tax reform. Around 70% of companies never pay tax, and this isn't because they are unprofitable, it's because they exploit loopholes. The ability to operate without any tax liability encourages inefficiencies. The second area is deregulation. There's always been progress, but the rest of the world is turning fairly fast, and even though Japan is reforming, it makes comparisons with the past rather than the rest of the world. But disposing of government assets would be an obvious place to start.
What happened to privatization of the postal system, which is like a gigantic bank? It was the rallying theme for the [ex-Premier Junichiro] Koizumi government in the snap election two years ago?
It was important for its symbolism rather than its actual impact. It would be better for the economy if they simply closed some parts of the organization down than privatized them. You risk setting up an institution with implicit government guarantees and subsidies competing with the private sector. But the reform is happening; it will be another 10 years before it's fully implemented. It's probably not good for some of the regional banks, which will face tough competition, but they have time to adapt.
Let's turn to the economy. What's happening with deflation, the consumer?
People don't appreciate the dynamism of this economy. The policy failures of the 1990s created so many distortions that once the roots of the problem -- the distressed banking system and deflation -- are resolved, you have a productivity catch-up and unavoidable efficiency gains, which is what you're seeing. The corporate sector is gradually more enthusiastic. The frustration with this domestic reflation, or normalization, is it's creaking to life with an extreme amount of caution after 10 years of misery.
Things are getting better. The consumer can get a job, his wages are going up, he is prepared to spend a little more. You are getting such good productivity gains from the better resource allocation that, unfortunately, the recovery is not generating inflationary pressure. What you see in real terms is what you get in nominal terms. Consumption is growing 1% to 2% real. If you could stick a couple of percentage points inflation on that, you get a respectable top line, but right now it's unimpressive.
What does this mean for interest rates? The Bank of Japan recently stayed its hand because of market turbulence.
Interest rates are going to go up. The BOJ is telling us that they will normalize rates almost with disregard to current economic conditions. Inflation has been back in negative territory for the past five months, and the BOJ is still saying, because it has a forward-looking policy, it is comfortable raising rates. There are two basic problems in this. The framework is misguided: The BOJ has a much lower inflation tolerance than most other central banks, and lower than economic theory suggests is sensible. They're unable to predict inflation, because it's hard to figure out how much spare capacity is there. It's difficult to have a forward-looking policy if you don't have confidence to predict what happens next.
So, rates will go higher. By when?
It looks to me like they will raise rates again, probably October, from 0.5% now, after making sure the data are still solid and the world is not melting down. My impression is that [BOJ Governor Toshihiko] Fukui would like to leave office with the rates at 1%, so maybe they'll raise again in March as a farewell gesture. It's less predictable beyond that, because you don't know about the new governor -- whether it will be someone more aggressive or a standard insider. The argument that they will raise rates again in October and March is not really based on an assessment of economic conditions. It's based on an assessment of the guidance being offered by the BOJ.
What does this mean for the yen?
I assume ¥117 to the dollar this time next year. There seems to be the assumption that as you put up interest rates, the interest-rate differential with the U.S. will narrow and the yen will go up. You start to question it if it's increasingly apparent that the interest-rate increases are misguided because then you question the outlook for domestic growth, asset prices and whether you want to be owning yen, either as a domestic or foreign investor. If you conclude the policy is misguided, the yen could easily go down when they raise rates.
You argued recently that Japan was a safe haven. Why?
The economy is a safe haven because it has this internal domestic dynamism that's simply a reaction to the distress of the past 15 years. Japan has not participated in the credit boom, in the financial innovation that helped drive the U.S. and Europe. Over the past five years, the money supply has grown 46% in the Eurozone, 31% in the U.S. and 8% in Japan. Clearly there's a risk to trade, but most people don't realize that exports are only about 15% of the economy.
But within the stock market, more than half the companies are large manufacturing companies -- export-based manufacturers where profits are very sensitive to external demand conditions. The second problem is even as foreigners only own about 30% of the market, they account for close to 60% of trading. If the foreign investor starts to withdraw, liquidity could go down. In my visits with investors, the Europeans are more comfortable with the idea of a clumsy, inefficient social democrat government and reasonable corporate success. Europeans are still more comfortable with Japan's growth. In America, the reaction to Koizumi's postal reform was really more striking. They're more negative now -- they see the return of political inertia or barriers against corporate governance.
So, people have been fairly relaxed about the prospect of Japan's economy growing 2% to 3%, but you have to be much more concerned as the stock market reintegrates with the rest of the world, which it's doing because 15 years of very sluggish domestic growth and deflation have shrunk the balance sheets of domestic companies. Those geared to a dynamic global economy became more important.
What's your view of equities?
For the past four or five years, you've had very positive economic conditions and persistent upward revisions to earnings forecasts, and the market has done well. We expect that to continue but not on the same scale, because the cycle has matured, operating gearing has diminished, as has room for macro-driven earnings surprises. In the '90s, the importance of management was very low, because the economy was driving earnings. Now we're entering a more mature phase, where sector selection is less important than management competence and valuations. It becomes a more stock-specific, micro-driven market.
What kind of earnings growth should we expect?
In the 5% to 10% range. You had a good bounce early in the process, which settled down to around 20%. But operating gearing is diminishing, your capacity utilization goes up more slowly. In America, the corporate sector persistently delivered profit growth well in excess of nominal GDP through continued pressure for governance and management squeezing out inefficient parts of businesses.
Are we not seeing the same in Japan?
There isn't the same pressure. It's a shame: It would be a source of stronger efficiency gains and a healthier stock market.
You don't sound too optimistic. How do small-caps look?
You can find some fantastic growth names at very reasonable prices, but it's not clear that now is the time to get in. Though it's probably getting reasonably close. Topix is 17 times earnings, fairly cheap, implying a 6% earnings yield, versus a 1.6% bond yield. The dividend yield is 1.4%. If you think there is going to be a significant improvement in corporate governance, then 17 times is very cheap, and if you think there isn't and growth will be dull, there's no immediate trigger. It would be surprising if you woke this time next year and the market was at 25,000 [from around 16,000 today]. Looking a little longer term, say a five-year view, you do have the pressing need to improve returns on domestic assets and improve domestic efficiency, so there will be greater pressure on corporates to improve returns.
That said, you can find some very interesting micro companies in Japan -- fantastic global companies and companies geared towards the domestic recovery, which is not well appreciated. We like Mizuho Financial [Ticker: MFG]. They're nicely geared to interest-rate increases, and active management of personal wealth through the sale of financial products. Banks were crushed in the past month. For 15 years, people assumed the worst in the absence of transparency. But the regulatory environment has changed so significantly the disclosure is fairly reliable. We like KDDI [9433.Japan], not because domestic telecom is roaring but because it looks cheap. We like Sumitomo Metal Industries [5405.Japan], which has great gearing to global energy investments. We like Nintendo [7974.Japan]. And the trading houses are coming up cheap, but obviously some people are uncomfortable with things geared to the global cycle at this stage.
Thank you, Richard. |
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nodoodahs
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| Posted: Tue Aug 28, 2007 8:31 pm Post subject: |
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Yeah, the volatility will have to calm down so that the currency losses don't knock the carriers out of the interest spread positions. It'll be a while before it's back on in force ... but it will be back, and this cabinet move just helps assure that.
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HenryTo
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| Posted: Tue Aug 28, 2007 8:27 pm Post subject: |
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| Yes, eventually. Sentiment (local polls) showed Japanese households to be more optimistic about the current government after the reshuffle. |
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nodoodahs
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| Posted: Tue Aug 28, 2007 8:06 pm Post subject: |
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What's bad for the Japanese economy is good for the carry trade.
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HenryTo
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rffrydr
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| Posted: Thu Aug 09, 2007 7:05 am Post subject: |
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Mrs. Watanabe, the Carry Trade's champion:
| Quote: | HEADLINE: Mrs Watanabe and our man on the omnibus LONG VIEW - JOHN AUTHERS
BYLINE: By JOHN AUTHERS
BODY:
Where does the money come from? World markets have been convulsed for several weeks now as cash is pulled from risky investments.
Financial markets appear to have generated much of their cash themselves, through such adroit means as taking advantage of slight differences in interest rates in different countries, or playing the huge and growing market for credit derivatives, which allow investors to buy protection against the risk of defaults.
But much of the money traces its way back to retail investors, who are hoping one day to use it to retire.
Different cultures have different names for their heroic retail investors. The cultural cousins of Britain's "Man on the Clapham Omnibus", include "Mrs Watanabe" in Japan, and the entire city of Peoria, Illinois, in the US. All are held to be intelligent and common-sensical, but not necessarily experts. The weight of their money will eventually be felt. So what are they doing?
Mrs Watanabe finds herself at the heart of the drama over the chronically weak Japanese yen. Many blame hedge funds. On this theory, it is hedge fund managers executing a "carry trade" - borrowing in yen to put money into higher yielding currencies like the Australian and New Zealand dollars, and pocketing the difference - who have pushed the yen down.
Another theory, however, blames Mrs Watanabe. Interest rates on savings products in Japan remain minimal. Invest almost anywhere else and you will get a greater return. International returns look all the better because of the weakness of the yen: and that weakness is itself reinforced by Mrs Watanabe when she sells yen in order to buy foreign investments.
Over the last year, the FTSE World ex-Japan index is up 27 per cent, in yen terms, despite a fall of 10 per cent in the last week. By comparison, Europeans, investing in the strong euro, have much less incentive to invest overseas. In euro terms, the FTSE World ex- Europe index is up only 11 per cent over the year.
There are even signs that Mrs Watanabe is taking advantage of the recent sharp increase in the yen, as risk aversion has increased around the world. When traders are worried about risks elsewhere, they tend also to be worried about the carry trade.
But Mrs Watanabe seems to have decided to buy (or in this case, go short the yen) on the dips. According to the Tokyo Financial Exchange, Japanese retail investors had by the middle of this week put a record amount in net long positions for the dollar, euro, sterling, Australian dollar, New Zealand dollar and Canadian dollar.
This makes it harder for the "carry trade" to unwind.
Foreign fund managers testify that the launch of any fund promising a higher yield, even if it uses lower quality securities to do it, will be snapped up by Japanese retail investors.
On this reading, Mrs Watanabe is a valuable source of stability for the world financial system. But it might be unwise to expect her to stay that way. For evidence, look to Peoria,
In the bull market of the late 1990s, US retail investors were steadfast. Even as the market grew more volatile in the last few years before the tech bubble finally burst, Peoria took every downturn as an opportunity to buy more.
Huge retail demand for internet stocks pushed their prices to unsustainable levels.
But Peoria could not be relied on indefinitely. In the last three years, US retail investors appear to have lost confidence almost entirely in the US stock market, despite the ongoing very healthy returns that have been available there.
Over the 12 months to the end of June, official figures from the Investment Company Institute show that a net Dollars 4.5bn was pulled out of US equity mutual funds, while Dollars 140.7bn flowed into international equity funds. This is a recent and drastic change of behaviour. Until 2005, inflows to international funds had never exceeded flows into domestic funds in an "up" year for stock markets.
Preliminary indications are that Peoria pulled out ahead of the latest dose of stock market turbulence. Trim Tabs Research, which monitors mutual fund flows, estimates that Dollars 5.5bn flowed out of stock funds on Tuesday of last week. Retail investors never bought into this US bull market, but still seem to have taken fright earlier than others.
Why has this happened? Peoria may be reacting to the same stimuli as Mrs Watanabe - the weak dollar of the last few years makes international returns look much better. The process becomes self-reinforcing, creating bubbles in emerging markets, and pushing the dollar down.
Peoria is also unconvinced by arguments for the US. But the key point is that it would be most unwise to rely on Mrs Watanabe to keep selling the yen. She might yet take profits.
Meanwhile, what should the Man on the Clapham Omnibus do? He should probably keep his head down. Amid such volatility, there are great bargains to be found, along with some great short-term trades.
But finding them is difficult - blindingly so for the Man on the Clapham Omnibus, who is not an investment professional. As he was sensible enough to be broadly diversified when the market turbulence broke out, that is probably how he should stay.
john.authers@ft.com
LOAD-DATE: August 3, 2007 |
Letter:
| Quote: | HEADLINE: Why Mrs Watanabe is going to keep her purse shut
BYLINE: By TAKASHI ITO
BODY:
From Mr Takashi Ito.
Sir, I have enjoyed the various views expressed in your newspaper regarding Japanese interest rates (Letters, April 12, 13 and 16). I would like to focus on one of the main points of contention, namely, the impact on consumption. Basically, would Mrs Watanabe spend more money if she earned more interest income, or would she actually save more (allocate more to cash)?
I don't think Mrs Watanbe is going to go wild with her extra interest income at Mitsukoshi (the high-end department store), nor is she actively optimising her portfolio returns. She is simply thinking about the future.
She is thinking about the high indebtedness of her government (higher than any country, with the exception of Malawi and Lebanon) and the shrinking population. She is wondering about a future of higher taxes, a retirement age of 70, and deep cuts in healthcare and pensions.
The goverment must show how the future is going to be different from this gloomy but highly realistic scenario.
Until then, whether interest rates are 0 per cent or 4 per cent, she is going to keep that purse closed. |
http://futuresource.quote.com/charts/charts.jsp?s=EURJPY%20A0-FX
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rffrydr
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| Posted: Tue Aug 07, 2007 6:43 am Post subject: |
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Mauldin this week is looking where he should be, where "subprime" story has little influence but liquidity does, Ms. Wantanabe's purse.
| Quote: | Until now, Japan had been 'floated' by ASSET reflation. That has included 'Land', and thus Real Estate. Interestingly, and SO a symptom of the monetary angle on reflation, we note that Real-Estate and Land have FAR, FAR, FAR 'outperformed' the Construction and Building sectors.
The BOOM has NOT been via a supply build-out. It is defined purely as monetarily-driven asset price reflation. Whoops, there is a problem !!!! The BOOM in Land and Real-Estate, along to a lesser extent in stock market wealth ... has NOT resulted in ANY of the following effects:
Rising Domestic Consumer Spending
Expanding Monetary Base
Consumer Price Inflation
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Lots of excellent charts. But he could be making the OPPOSITE argument: for though he's looking for downside forces apart from our story to confirm our story, he's assuming down is where we're headed.
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dash
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| Posted: Wed Aug 01, 2007 11:50 pm Post subject: |
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In as much as the Yen carry trade is an important gauge of whether 'risk contagion' is spreading, it's interesting to see that Dollar/Yen hasn't tested the March low. In fact the series of higher highs, and higher lows still seems to be intact:
http://tinyurl.com/364nnb |
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HenryTo
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| Posted: Sun Jul 22, 2007 1:32 pm Post subject: |
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Yes, you're right. Japan has been relocating its manfactuaring to China in a big way since early 2003:
Here is an article discussing Japanese corporate governance and why Japan still isn't a good buy despite its stock market being the most undervalued in the developed world:
http://www.bloomberg.com/apps/news?pid=20601084&sid=ay.myHJUEl3Y&refer=stocks |
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rffrydr
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| Posted: Sat Jul 21, 2007 12:00 pm Post subject: |
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Japan has been loosing market share because that's what happens when you dismantle the Keiretsu and reinvent them... in China!
http://en.wikipedia.org/wiki/Keiretsu
Long before China became the world's factory they became Japan's.
The reason they're loosing the '05 US investors is that 1. Yen weakness 2. Their market just isn't any fun.
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HenryTo
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| Posted: Sat Jul 21, 2007 1:21 am Post subject: |
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Bank Credit Analyst on the Yen:
http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20070717.GIF
| Quote: | | In fact, Japan has been losing market share versus industrialized economies since the start of the decade, even though demand from China for Japanese capital goods has held strong. Similarly, Japan's deteriorating terms of trade are weighing on the yen. The terms of trade have declined by roughly 30% in the past five years as commodity prices have surged, and are now at a 25-year low. Notably, in the past three decades the real trade-weighted yen has not appreciated on a sustainable basis without an improvement in the terms of trade. Our upbeat view on oil prices indicates a turnaround on this front is not imminent. |
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rffrydr
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| Posted: Wed Jul 18, 2007 11:36 am Post subject: |
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When is a stock market not a stockmarket?
| Quote: | Byline: DAVID TURNER
TOKYO -- The new head of the Tokyo Stock Exchange yesterday set out plans to move away from "old-fashioned securities" to close a growing gap with more innovative exchanges such as London, Singapore and Hong Kong.
Atsushi Saito, who will succeed Taizo Nishimuro as president later this month, said the TSE should turn itself into a "financial products exchange" by offering a wide range of derivatives and "exotic products".
In his first interview with the foreign press since accepting the top job at the TSE, Mr Saito pre-dicted that "no more than three" of the world's leading stock exchanges would survive as significant global competitors.
He said it was vital for the TSE to widen its range of products and suggested his top priority would be to launch commodity index futures and a similar product based on the Japanese property market: "Unless we can plan attractive products, trading will go to London, Shanghai, Singapore, Hong Kong, New York."
Mr Saito made clear he was deeply concerned about the threat to traditional exchanges from so-called "over the counter" trading by international brokerages. "If you visit the trading rooms of Morgan Stanley, Goldman Sachs, they're trading stocks all over the world on an OTC basis," he said.
Mr Saito, who carved out a successful career at Nomura Securities in Tokyo and New York before taking charge in 2003 of the IRCJ, the state-backed turnround body for troubled Japanese companies, suggested the TSE would continue Mr Nishi-muro's strategy of seeking alliances with foreign exchanges. Mr Nishimuro's tie-ups included deals with the New York and London stock exchanges.
The new chief's plans for commodity index futures could have consequences for Japan's four struggling commodity exchanges given the TSE's size.
Mr Saito backed the Japanese government's plans to transform Tokyo into an international finance centre but warned that significant reforms would be required to make the plan work.
"Manufacturing is shifting from Japan to abroad so we have to create a new industry, a financial industry," he said. "A lot of companies that want to list will come here but, before that, we must change the service quality of our stock exchange." Only four foreign companies have listed in Tokyo since 2004.
Source Citation: Turner, David. "TSE to launch 'exotic products' to vie with other bourses.(COMPANIES INTERNATIONAL)." The Financial Times (June 2, 2007) |
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rffrydr
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HenryTo
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| Posted: Tue Jul 17, 2007 12:10 am Post subject: |
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An older article. Myron Scholes has already opened an office in Japan and is going to try to take advantage of the boom in alternative investing in Japan:
http://www.bloomberg.com/apps/news?pid=20601101&sid=aMqG1zdWd6f8&refer=japan
There is a great chapter on Myron Scholes and Platinum Grove Asset Management in Peter Bernstein's new book "Capital Ideas Evolving."
| Quote: | Scholes' Platinum Grove Asset Management, based in Rye Brook, New York, manages about $4.5 billion, he said. About 10 percent of its funds come from Japanese investors. Its Japanese arm, which has nine employees, started in Tokyo in November and was registered as a securities investment adviser in March, according to documents provided by the company.
The firm's Platinum Grove Contingent Capital Fund has an average annual return of 9.4 percent after fees, Scholes said. |
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HenryTo
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| Posted: Thu Jul 05, 2007 11:24 am Post subject: |
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Hi Geoffrey,
I would give it another week or so. Once liquidity comes back next week, you never know what it's going to do. My inclination is to only sell the Euro-Yen on a gap up, primarily because of the huge carry disadvantage that you get when you sell the Euro vs. the Yen. If you don't get the gap up, then you don't short.
Just like any other "financial dislocation" strategy, however, this should only be done as a hedge or in moderation... 
Take care,
Henry |
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