Thursday, May 23, 2013

Market Analysis: Japan

From Bloomberg:

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami. 

Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions. 

Let's take a look at the underlying data:

In the official data, notice that private consumption was strong in the 1Q12, but weakened throughout 2012.   But in 1Q13, it bounced back strong.  Private residential investment contracted in 1Q12, but has been expanding at varying rates since.  The real problem has been gross private non-residential investment, which is now in it's fifth quarter of contraction.  However, Abe says he wants to specifically target this area of GDP going forward:

Abe said he aims to get annual private investment back to 70 trillion yen ($682 billion), the level before the 2008 financial crisis, through deregulation, taxes, spending, and equipment leasing deals. He also outlined a target of tripling infrastructure exports to about 30 trillion yen by 2020. Abe has said he will reveal his full growth plan ahead of the Group of Eight summit in Northern Ireland on June 17-18. 

The measures are part of the “third arrow” of the prime minister’s strategy to revive the world’s third-largest economy through structural changes to improve competitiveness. His push for increased Bank of Japan monetary easing combined with fiscal stimulus has persuaded Japanese to open their wallets and sent stocks soaring as the yen weakens.

“We have gained international understanding for Abenomics,” Abe said.

As we've noted before (see here and here), Abenoics is paying off.  First, we've seen a large decline in the yen.  Despite having a weak economy post-recession, the yen rallied as traders perceived the currency to be a safe haven currency, leading to a long-term rally.  This hurt Japan's exporters -- a primary driver of overall Japanese growth.  Recent BOJ moves have been targeted to lower the yen's value -- a move that is for now being accepted by the G-7:

Finance ministers and central bankers reaffirmed their February commitment to “not target exchange rates” at a meeting in Aylesbury, near London, U.K. Chancellor of the Exchequer George Osborne told reporters May 11. 

The Bank of Japan “can and should ease again if the current measure does not seem to be working,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said in an e-mailed response to questions. 

While signaling acceptance of the yen’s decline through 100 per dollar for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen 15 percent against the dollar this year and 13 percent versus the euro as the Bank of Japan stepped up monetary stimulus. 

Here is how the Bank of Japan characterized the economy in their latest policy statement:

Japan's economy has started picking up. Exports have stopped decreasing as overseas economies have been moving out of the deceleration phase that had continued since last year and are gradually heading toward a pick-up. Business fixed investment continues to show resilience in nonmanufacturing and appears to have stopped weakening on the whole.  Public investment has continued to increase, and housing investment has generally been picking up. Private consumption has seen increased resilience, assisted by the improvement in consumer sentiment.  Reflecting these developments in demand both at home and abroad, industrial production has stopped decreasing and signs of picking up have become increasingly evident.  Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been negative, due to the reversal of the previous year's movements in 2 energy-related and durable consumer goods. Some indicators suggest a rise in inflation expectations.

Let's take a look at the daily stock chart of the Japanese ETF:

The daily chart shows a strong rally starting in mid-November, with a nice balance between rallies and consolidation.  The EMAs are bullishly aligned with prices using the EMA for technical support.  The MACD is strong, but it has stalled over the last month and a half.  However, the CMF remains strong.