Is the the Nikkei 225 index passing 30,000 a sign of a new era for Japan?

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by Shaun Richards

Today we are going to take the advice of Rudyard Kipling and look east. In particular to the Far East and Nihon. So let me open by saying well done to any readers who have been long Japanese shares and hence its stock market. From Nikkei Asia.

TOKYO — Japan’s benchmark Nikkei Stock Average breached the 30,000 mark on Monday for the first time in nearly 31 years, as strong corporate earnings and GDP data coupled with optimism over COVID-19 vaccine development prompted investors to flock to risk assets.

The blue-chip Nikkei index jumped over 500 points, or nearly 2%, to hit its highest level since August 1990, when the asset bubble burst in Japan. The broader Topix gauge rose 1% to a three-decade high.

Actually the date resonates with me as I first worked in Japan in August 1990, so I am feeling a bit older today. So let me give you a blast from that particular past which is that the difference between the two main Japanese indices was the banks as one had a weighting of 8% and the other over 30%. Unthinkable now of course but a reminder that Japan’s “lost decade(s) have the banks at their core.

We can stay with a particularly Japanese vibe as part of the food news behind this was rather behind the times elsewhere.

Monday’s rally followed positive news over the weekend and into the working week. On Sunday Japan’s Health Ministry officially approved the coronavirus vaccine developed by U.S. drugmaker Pfizer. The country plans to begin vaccinations this week, starting with health care workers. Investors welcomed the progress, and hopes are rising that Japan’s third wave of coronavirus infections will soon be brought under control.

Indeed the stock market has been on quite a tear.

The Nikkei index has risen more than 1,800 points, or close to 7%, in the last two weeks. The strong momentum has been supported by better-than-expected earnings announcements from Japanese companies, which has encouraged investors to pick up undervalued stocks, mostly in sectors that were hit hard last year amid the pandemic, such as steel, mining, automobiles and retail.

Also there is one area no doubt benefiting from the chip shortage being mentioned by many car manufacturers.

Semiconductor stocks, which have become an investor darling amid a surge in pandemic-driven demand, also rose.

We can also take a 2021 perspective as the Nikkei Asia points out.

The Nikkei index has risen nearly 9% since the beginning of this year, while other benchmarks like the Dow Jones Industrial Average remain at about a 3% gain. The Nikkei has also outperformed other indexes compared to a year ago, showing a strong rebound since the coronavirus outbreak.

The Japanese media will love that but the longer perspective much less so.

The Nikkei Index touched an all-time high of 38,915 in December of 1989 during the asset-inflated economic boom in Japan. Shares crashed shortly after following the central bank tightening its monetary policy in response to overvalued assets, and the index has yet to fully recover.

For younger readers the banking and asset bust of the 1990s was a forewarning for the credit crunch although sadly we in the West learnt little if anything. But as you can see in spite of the recent gains Japan is still singing along with Kate Bush/

Be running up that road
Be running up that hill
Be running up that building
See if I only could, oh

The Economy 

We can switch to NHK for this.

The Cabinet Office says Japan’s GDP grew by an annualized 12.7 percent from the previous quarter in real terms, which is a lower growth rate than the historic surge of 22.7 percent the economy saw in the July to September period.

So we have row quarters of growth in a row and if we remain in annualised terms we see that 8.1% of the growth was domestic and 4.6% came from trade. In fact exports were 52% higher but imports only rose by 17%.

There are a couple of particularly Japanese perspectives to this. Firstly it is that the Imputed Rent game ( where you add rents to an economy when in fact for obvious reasons owner-occupiers do not pay it). Usually this boosts GDP and reduces inflation, but in Japan due to the bust Imputed Rent has reduced GDP and domestic demand would have grown by 10.9% rather than 8.1% otherwise. Also for all the claims about beating what they call “deflation” prices fell as nominal GDP growth at 10.5% was below real GDP growth. It is another tick in my box for the argument that lower prices can boost an economy but the Bank of Japan does not think like that.

In spite of a very strong couple of quarters 2020 was a bad year for the Japanese economy.

The government’s figures also show that the GDP for 2020 shrank by 4.8 percent in real terms as the coronavirus pandemic weighed on the economy. That is the worst contraction since 2009 amid the global financial crisis.

Regular readers will be aware there were already problems highlighted by the fact that GDP growth was only 0.6% in 2018 and a mere 0.3% in 2019.

Returning to the stock market these numbers were better than expected ( just like the UK on Friday) and thus will have helped.

The Tokyo Whale

The Bank of Japan has so far bought some 36.1 trillion Yen of equities. It has been a regular buyer on down days and the effect of the Covid-19 pandemic on equity markets saw it increase its clip size to over 100 billion Yen. So this is the most literal definition of a central bank being a put option for equity markets. Having the read the above you might think it would not have been buying in 2021 but in fact it bought four times in January although the clip size has been reduced to 50 billion Yen.

At first this looks really good as I recall the Bank of Japan being invested at around 19.500 in Nikkei index terms. So with the later purchases now say 20.500. But unlike an ordinary investor who can sell their fund or equity precisely who do you sell some 50 trillion Yens worth or so too? After all if there were buyers around for this the Bank of Japan would not have been buying in the first place.

So they would be relying on a type of “index illusion” in the same way one might look at “money illusion”,

Comment

So we can stick with the congratulations theme and those long Japanese equities might like a celebratory glass of wine or turning Japanese a glass of sake. But the story twists at the Bank of Japan which is like a whale in a lake. You might think that things cannot fall with it there but the Japanese bond market shows that you can. On our way we set a new record here as the 537.5 trillion Yen of Japanese Government Bond holdings is I think the largest number we have noted.

But JGB prices have been falling recently and the thirty-year yield which dipped towards 0.2% as the pandemic hit is now 0.68%. Considering there is a Tokyo Whale in there that is quite a change.

The Yen has been relatively quiet after the pandemic led it to surge and has been 103-105 or so versus the US Dollar for a while now. That is also a change as a much higher Nikkei 225 would usually be associated with a weaker Yen. So below an apparently successful surface there is much going on.

When you’re big in Japan, tonight
Big in Japan, be tight
Big in Japan, where the Eastern sea’s so blue
Big in Japan, alright
Pay, then I’ll sleep by your side
Things are easy when you’re big in Japan
When you’re big in Japan… ( Alphaville )

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