Tuesday and Wednesday was the US data, yesterday it was EU/Germany data, and this morning we’re getting Japanese 3rd quarter data. This together with some interesting Bloomberg interviews on the prospects for Japan’s equity markets and another article on just how much Japan is influencing equity pricing around Asia due to the hunt for yield. But first, the laundry list of Japanese data coming out. (All times in Japan Standard Time, or GMT+9.)
- 08:30 – Unemployment Rate (Exp/Prior: 3.6%)
- 08:30 – Household Spending, YoY (Exp: – 5.1%, Prior: -5.6%), MoM (Exp: 0.0%, Prior: 1.5%)
- 08:30 – CPI YoY: National, Nat. Core (Exp: 2.9%, Prior: 3.0%), Tokyo, T. Core (Exp/Prior: 2.5%).
- 08:30 – Jobs-to-Applicant Ratio (Exp/Prior: 1.09)
- 08:50 – Industrial Production, Companies’ Output Forecasts, 1M / 2M (Prior: 6% / 3.5%)
- 08:50 – Industrial Production, Industrial Output MoM (Exp: -0.6%, Prior: 2.7%)
- 08:50 – Retail Sales YoY (Exp: 1.2%, Prior: 2.3%)
- 08:50 – Capital Flows, Foreign Bond/Stock Investment into Japan (Prior: JPY 212.5B / JPY 909.8B)
- 14:00 – Construction Spending – Orders (Prior: -40.3%)
- 14:00 – Housing Starts YoY (Exp: -15.0%, Prior: -14.3%)
There are some data coming out of Australia, Germany and the UK relatively early tomorrow, and the US markets will be back trading in force since there was no OPEC cut, so things might look a little hectic in yen crosses and the different stock indices on the Tokyo Stock Exchange.
What lends this particular data release a lot of weight is that it’s the last real big batch of important numbers we get before the December 14th election except for a bit of Machinery Orders on December 10th, so this might be our last, hard weather vane on economic data which will shape the debate, and mostly how Abe will have to wiggle through the political landscape to get a bigger mandate for economic reform.
Over to some more analysis of what we are actually looking at then!
The equity market prospects look good, according to the analysis by Dan Fuss at Loomis Sayles & Co. He bases his opinion on the job market movements, and getting people into work. I agree on this generally, but I think that the golden egg here will probably be in increased compensation to Japanese workers, and that is why I’m keeping an eye out on the Jobs-to-Applicant Ratio tomorrow. Unemployment of 3.6% is very good, and the problem isn’t so much that people are bumming around not spending, but much more that people are bumming around at low-paid jobs and that the job market structures are not conducive to offering a career path for women after they’ve gotten into jobs.
The focus on the job market is great though, and the ideas for just what to do to fix the market is a focus I have rarely seen. Very productive stuff! The question is if Japan can become a leader in consumer electronics and high-tech production again, or whether different focus on high value-added industries might be the way to go. Green technology, power conservation products and energy production methodologies could be an area where the Japanese obsession with technical excellence, continuous improvement and spec-perfectionism could go a long way! Another area that I personally think could be overblown but nonetheless other analysts hold with high hopes is obviously web applications and portable technology innovations on both the hardware side and software side.
Finally, it is, indeed, a mad world when a fixed-income guy rejects one of the world’s biggest bond markets, says that equity is the way to go, puts his money where his mouth is, and states that a tax increase to balance the budget would be incomprehensible! Arguably, a tax hike could be beneficial depending on the policy mix, but I definitely see the sentiment!
Turning instead to the prospects for the Japanese markets to sustain a carry trade, and offer benefits for both local Japanese investors and overall Asian markets is very, very interesting! We’ve known that there is Japanese interest in the Hong Kong and China markets, and now we’re getting more data on exactly how much. Somewhere north of 3 trillion yen in outwards equity investments over the last six months to be exact! Total overseas purchases year-to-date are expected to be at 11 trillion yen when including bonds as well. Obviously this helps a) keep equity markets afloat, and b) lower the yen.
The expectation of a 3 trillion yen outflow towards Asian economies in two years seems almost low in this comparison, given that through-September data for China, Malaysia and Hong Kong alone was higher than 690 billion yen, indicating close to 1 trillion yen for the full year! Once the GPIF enters the picture and the difference in its allocations towards foreign stocks will be more than 11.4 trillion yen alone, that really seems low!
Asian markets will probably grow, and rather than seeing outflows from the data, given geopolitical risks in other areas, I do believe that opening up of China, continued development of off-shore financial centres and its focus on expanding trade with its Asian neighbours will make Asia a place to direct assets towards in the future! Central and South America saw nearly 5 trillion yen of inflows this year, so there is obviously a lot of potential bias to change in the Japanese investment mindset!
This outlook means that I implicitly agree more with the Nomura analysis of investment flow targets (China/Hong Kong, South Korea, and India) than with Brown Brothers Harriman & Co. (India, Philippines, Indonesia). Partially, I have a hard time seeing a sustained functioning of the Indian economy, given several problems, and the risk there is simply too great. Sure, if commodities keep plummeting and the US dollar remains strong, then that is a boon for India, but that’s a little bit too if-fy for me… Similarly with an already huge exposure to the US (directly in North America and very much through the implicit South America link) why on earth would any decent money manager commit more to getting US correlation from non-US shares when there is a viable, fast-growing and increasingly safer alternative with little US correlation? I think the analysis essentially fails basic CAPM, and thus uncorrelated targets is the way to go for managers that value diversification and safety as much as the Japanese do.
Finally, we have some interesting technical analysis that could be good to overview before we get the data coming in the morning and the markets throw their doors open! This data were snapshotted at midnight China Standard Time, and is subject to change.
Wow! We got a lot of support from the channel! Getting the OPEC meeting decision helped pull the yen down and bounce off the channel, taking out the 48h and 120h EMAs in one candle! We’re close to an ADX/DMI bullish cross, and if that would lead to a MACD bottom that would be great for continued momentum to shoot price towards the recent peak near 119 and into the 118.18-121 range. Previous tests of this trend line post-BOJ were enough to force MACD EMA divergence bottoms, and drag the dollar price up by about 2 yen, but those times there wasn’t even a DMI cross!
The Nikkei looks a lot worse off, mostly thanks to its higher volatility playing harder with the ADX/DMI and forcing line breaks. The short-term trend versus the USD/JPY rate is obviously still better with a mild upwards slope, and there is a significant and justifiable break line (lowest of the three upwards trend lines) that gives reasonable support. EMAs will provide faster resistance, and the underlying studies look marginally worse, but after all, this is just technical analysis stuff. The oil price falling drastically post-OPEC will generally be a great positive for Japan, given its import structure, and this will probably reflect much better in broader indices like the TOPIX and JPX Nikkei Index 400 than in the Nikkei 225.
Summary: “Keep calm and carry trade.”