Tuesday, April 9, 2013

Market Analysis: Japan: Recent Central Bank Action and GDP

From Bloomberg:

After watching Ben S. Bernanke take unprecedented steps for four years to rebound from the worst recession since the Great Depression, the Bank of Japan (8301) is signaling that the Federal Reserve’s full-throttle approach to stimulus is the way to end 15 years of deflation. 

New BOJ Governor Haruhiko Kuroda’s move this week to embark on record easing means the world’s four biggest developed-market monetary authorities -- the BOJ, the Fed, the European Central Bank and the Bank of England -- are aligned in their commitments to spur growth and return their economies to full strength. 

“This is unprecedented on many levels,” said Pippa Malmgren, president and founder of Principalis Asset Management LLP in London and a former financial-market adviser to President George W. Bush. “Not only do you have the most in terms of size of economy or number of central banks, but the effort is a record effort. We’ve never seen such unconventional methods used to create as much inflation as possible.” 

The Financial Times provides the details of the plan:

The BoJ said it would double Japan’s monetary base from Y135tn ($1.43tn) to Y270tn by December 2014, mainly by buying more long-term government bonds. That will raise the average remaining maturity of its holdings from about three years to seven years, keeping downward pressure on yields all along the curve.
Under the new measures, the BoJ will expand its balance sheet by 1 per cent of gross domestic product each month this year and by 1.1 per cent per month in 2014, according to estimates from Barclays.

Here is the intended result (we don't know if this is what will happen):

Private spending will rise if people think saving money will provide a feeble return, a weaker yen spurs exports, and expectations that prices will be higher in future prompt a desire to spend today. It also allows the government to borrow more without worries about funding the resulting higher deficits and debt. So long as there is spare capacity in Japan, such a move should improve output and growth without sparking an inflationary spiral.

And finally, here is the announcement from the BOJ.

Let's place these actions in context with an overview of the economic backdrop.

The top chart shows that since the big recession, Japan had a second recession caused by the natural disaster a of early 2011.  For the last three quarters, GDP has also been negative.  The lower chart shows that the primary reason for the contraction was a drop in private demand in the form of non-residential investment and a drop in exports.

The above chart from the same report shows that shipment of capital goods took a massive nose dive in 2012, highlighting the lack of domestic investment.

Let's turn now to Japan's Leading Index:

The Conference Board LEI for Japan increased for the second straight month in January after eight consecutive declines. Large positive contributions from business failures (inverted), stock prices, and the index of overtime worked more than offset negative contributors from the Tankan business conditions index and dwelling units started. Between July 2012 and January 2013, the LEI fell by 0.7 percent (about a -1.5 percent annual rate), a moderate improvement from the decline of 1.5 percent (about a -2.9 percent annual rate) between January and July 2012. Additionally, the strengths and weaknesses among the leading indicators have remained balanced in the last six months.

Let's look at the internals:

The biggest negative influence is the Tankin business conditions index, which has been negative for the last five months.  Dwellings units have recently subtracted from the number as well.  Also note that the dix month growth rate of labor productivity has been contractionary as well. 

Let's turn to the Japanese markets, first remembering that the new government has been in place a few months now.

On the daily chart, notice that prices traded in a range between June and mid-January, bouncing between the 8.6 and 9.4 level.  Prices first started to move higher in mid-December, and have been in a rally since.  There are several periods of consolidation (early January, late February, early March), but those gains were always followed by strong moves higher.  We do see a sell-off last week on the weakening economic news, but prices have rallied higher.  Also note the strong volume and rising CMF readings. 

The weekly chart is where the Japanese market really shines.  Notice the very strong MACD and CMF readings, along with the rising prices.

The market is rising in anticipation of the potential success of the new government's stimulus program.