It’s not all champagne and congratulatory claps on the back. In fact, most stock indices outside of China are down, thanks to the spectacular miss of GDP data from Japan. A 1.6% drop versus an expected 2.2% gain is no small miss, and nothing short of a big slap in the face of a lot of bullish expectations for the underlying Japanese economy, mine included.
What perhaps surprised me most is that the market seems to look at bad news like bad news, and the yen was back into strengthening. This makes sense for the Nikkei 225 and TOPIX, logically, but is an enormous surprise given the BOJ market support to the tune of 80 trillion yen and the “bad news are good news” regime that seems to prevail in equity markets under quantitative easing and monetary support. Are Japanese investors smarter than western dittos? Are people starting to give up on Abenomics working if this was such a great miss? It will take a while to tell.
Bearish market reactions were widespread, with all major indices and futures save China being down on the news, and the USD/JPY seeing a high just north of 117 before going back down to tag the November 6th – 7th peaks around 115.5 and the quarterly top Bollinger band. The Nikkei 225 and TOPIX took the news horribly poorly, down 2.96% and 2.14% respectively. The Nikkei 225 even got sent down below the 17 000 point level, although this has been reclaimed in futures trading, but whether this can be reclaimed in live trading remains a test to be seen.
In the mean time, we will have a meeting of the BOJ starting tomorrow and continuing into Wednesday, with the meeting minutes out on Christmas Day. I don’t think too much will come out of this but a bit more of talking, potentially adopting an even more accommodating view in the long term, but no real decisions prompting action either way. Still, this would be a rather big week for the yen if Abe does actually call off the tax hike (which seems to be a yen negative today even though the rumor shot the USD/JPY through the roof last week? Make up your mind, financial reporters!) but I think that something more is probably needed to wash off the bad taste of this GDP report.
Elsewhere, Thailand grew at an annualized pace of only 0.6%, versus expectations of 1% growth, largely because of falling exports. This is obviously worrying in its own given Thailand’s export dependence, but things are at least looking better here than what Japan has to show for itself.
Time to look into the details, after the jump!
Perhaps most baffling is the horrible goods flow mismanagement highlighted by the yo-yoing levels of Japanese corporate inventories reported on by Bloomberg. Inventories down before the tax hike when consumers are front-running optical inflation, and then back up spectacularly as spending grinds to a halt and few if any consumers are buying, and then down again now when there is a better case for economic growth… wow. I can’t really fault companies for hunkering down on this last trip, but it looks pretty stupid on all accounts to go on the roller coaster that led us here. However, this highlights a lot of things that really needs to happen in Japan, and I get less and less convinced that Abe Shinzo is the right man to do it if he drives through a flash election and postpones the tax hike. “But, Timmy, tax hikes are bad for the economy, just look at what happened in 1997!” Read this discussion on the pros and cons of Japanese broader tax reform, and I will rest my case.
Companies are not doing domestic CapEx? Well… with extremely high corporate tax rates it probably isn’t all too appealing to invest in anything risky, which seems to be the whole Japanese money management mindset.Lowering corporate taxes, or making hiring and firing easier, or allowing women into the work force, or lowering the burden on companies and consumers for social security payments would probably be a good start to get payroll and payouts up.
Here’s a crazy idea: why not make tax/social security deductions on stable, long term savings above certain levels in tranches? If you have, say US$1 000 000 in pension savings already, why would you or a company employing you be required to keep paying contributions into such a fund? Why not lower this and turn it into salary? If people want to place massive numbers of yen into a fund, they can save up and do that themselves, and if they already have this level of savings, they probably know how to manage their money!
Getting velocity of money going is probably the main need for fiscal / monetary policy reforms, and if this can be done in ways that promotes hiring, opens up better career paths in the long term, and includes women in Japan to a much higher degree than what has previously been done, then I think Abe should be on this yesterday, rather than dragging his feet on the “third arrow”. As much as I dislike the prospect of a snap election being called, if this gives the winner enough power to push through on relevant reform to get it back on track, then let the fumes of volatility frustrate traders as much as they may. My fear is just that populism probably isn’t the way to go here, and elections are a great way to build on that.
Companies in Japan need to reform themselves and root out a lot of management inefficiencies, of which it seems like this inventory forecasting fiasco is just a spectacular and sad symptom. Abe’s cabinet needs to help them root out this and provide companies with incentives to invest and hire in Japan if anything will work, and so far that does not seem to be the case. If Japan wishes to promote equity market ownership like the GPIF rebalancing and the BOJ purchase targets seem to indicate, then twiddling your hands on tax reform essentially means making stock market soufflé. Lots of air and sugar, but it can very easily deflate. I would prefer just about any other cake with some substance at this point.