Quite a lot of info came out about Japan today, all of which I have eagerly been looking for for a longer time. Lets dig in!
First up, we have some actual numbers out of Eisuke Sakakibara, previously of the Japan MOF and titulated “Mr. Yen”:
In this race of buying yourself more time, this looks set to be a pretty good backstop. Compare this to the sorry state of European financial positions.
As I have written about before, there is rather much talk about the Liabilities side of the sovereign basic accounting formula, but very very little on the Asset side. Seeing a more holistic view that actually allows one to perform preliminary analysis and actually build a greater understanding of why the yield on 10y JGB paper seems stuck at below 1% is always welcome!
In all fairness, as both Greece and any and all experience from the 2007-2009 bank failures have shown, assets are fungible. One might very much for example question the value of the US$900 bn worth of US treasury bills (~20% of GDP, with the remainder of their US$1.15 tn foreign currency reserves – 25% in total – probably put in euros and pounds). Can anyone say QE double whammy? First the yen goes up, then the value of the government held assets goes down on the market and in currency terms…. ugh. Again, the value of companies like Japan Tobacco etc. is really hard to evaluate on a Japanese market. Estimating that a sale is held internally, the money by investors to buy these assets has to come from somewhere. What will be liquidated for that sale to happen? Why, JGB’s most likely! Therefore, the only real cash infusion would be from outside.
Japan has done several things to ease this transition into sales of assets and in their own way trying to open up the markets. Examples include the trade pacts written with both China and India recently, and better yet, a rather firm government presence at the Asia Venture Capital Journal meetings. You read that right, the country long known as an anathema to shareholder activism has government reps courting private equity companies to entice them to come back and see some of the value in Japanese assets. There is obviously still a long way to go, but things are looking increasingly like they are on an improving path. More than what can be said about Europe, and for the next year the US as well (business fundamentals will be bad but there’s an election year so expect can-kicking and pump-priming for the winner to clean out with more of the same), and some would say China as well. Fingers crossed for Asia, I don’t agree with the analysis going down on the hard landing scenario in China, as you should know.
What else flew under the radar today that didn’t seem to move anything much?
Now, this is pretty important stuff, and the link contains better snippets as well, including how things have gotten progressively cleaner for Japanese companies after their exposure to the Thailand flooding and what possible effects there could be from a stimulus package which is in the pipeline. there are worries about a strong yen, which is indeed true in euro-terms, but for most other Asian exports and the US situation, the yen is no more of a nuisance than it was at the start of Q4 2011. On top of this, the US is being rather pumped in the short term by household savings rates running down, and still awaiting the US$100/bl oil shock to properly feed through the supply chain should give a small cushion. Agility in getting China on board and enacting stimulus by the time this comes full circle is imperative.
Now, one question comes around: is this sustainable? Well, Japanese companies are getting more and more efficient, and things are indeed looking up here. They have been battling a rising yen for the better part of forever, and I don’t really see what would be the difference now. Also, many of their exports (as were noted during the after-Tohoku-quake supply chain disruptions) are actually fairly price insensitive. Especially in the machinery orders sector. Their Asian competitors are producing from China, Korea or Taiwan, where a weak yen won’t really help, and the quality gap is what Japan sells on. Their European competitors (read: German, and actually partially Italian industrial machinery companies, surprisingly) have a fair grip on the market because of customer loyalty and often case nationalistic sentiments. It’s easier to deal with your own cultures, and the Japanese prevalence for end result on product over machine internal specifications is something that often acts to their detriment. (Westerners like horsepower, precision is less sexy!)
In short – price is really not that much of a matter to the companies that buy Japanese quality! Some contacts with exposure to this part of the Japanese industrial sector have also told me that as far as they can see orders are flowing in and interest is picking up for Japanese goods. It’s not much, and deserves to be steeped in salt, but it’s encouraging! To reiterate the point: yen sensitivity of the Japanese private sector profits is overblown outside of car manufacturers.
To throw out a longer-term outlook and span this out in general, I would wager that the yen will remain solidly priced, and I retain my calls for a US$/yen ratio of 73 before H2 2012 and below 70 by year end from technical analysis. That said, I do believe that the measures taken and strengths of the Japanese economy in the short term will make it attractive to invest in. Again, a strong currency doesn’t hurt if you’re not falling faster than it rises! In quick, be conservative or maybe even short, then turn it around as stimulus and QE kicks in and/or the cinders of Greek fire slowly die down.
Top of my wishlist: some more time to actually complete the returns a dollar exchanged into yen and invested in the Nikkei 225 in January 2000 would have given to date. Analysis coming!