Japan is more than just a macro trade

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Marcuard's Market update by GaveKal Dragonomics

The market’s reaction shows that most investors were taken by surprise by Friday’s announcement from the Bank of Japan. They should not have been. BoJ governor Haruhiko Kuroda has declared time and again that he watches growth numbers closely, and would act on any signs of a deterioration. Those signs were officially acknowledged on Friday when the central bank published its three-year growth forecasts, halving the outlook for this year.
This evident deterioration brought the ‘Kuroda Put’ into play, emphasising that the BoJ remains committed to reflating the economy. That means the yen will continue to weaken, Japan will become more competitive on a relative basis, and corporate profits will continue to rise. As time goes on, foreign investors will find it hard to stay away from a stock market rally neatly orchestrated to coincide with the rebalancing of the Government Pension Investment Fund’s portfolio towards equities (with other domestic pension funds likely to follow) and plans to funnel the savings of millions of Japanese into stocks via the country’s year-old tax-free ‘NISA’ savings accounts.
Beyond this, however, we find it surprising that Prime Minister Shinzo Abe gets so little credit for turning himself into Japan Inc’s biggest salesman. Look at the numbers: since the start of his second mandate, Abe has visited 49 countries in 21 months, and taken hundreds of different Japanese CEOs along with him for the ride.
The message these CEOs have been spreading is simple: Japan is a very different place from 20 years ago. Companies are doing different things, and investment patterns have changed. Many companies have morphed into completely different animals, and are delivering handsome returns as a result. The relative YTD outperformance of Minebea (+92%), Mabuchi (+52%), Toyo Tire (+50%), Renesas (+36%), Fuji Film (+24%), NGK Insulators (+19%) and Nachi-Fujikoshi (+15%) have been enormous. Meanwhile, Panasonic has transformed itself into a car parts firm piggy-backing on the growth of Tesla’s model S… and the examples go on.
Yet as these changes have occurred, most foreign investors have stopped visiting Japan, and most sell-side firms have stopped funding genuine and original research. For the alert investor this is good news. As the number of Japanese firms at the heart of the disruptions reshaping our global economy — robotics, electric cars, self-drive cars, alternative energy, healthcare, care for the elderly — continues to expand, and as the number of investors looking at these same firms continues to shrink, those investors willing to sift the gravel of corporate Japan should be able to find real gems; gems that will not always depend on the ‘Kuroda Put’ to thrive.
Which brings us to Neil Newman and Alicia Walker, two Japan analysts who in June 2013 they launched their own Japanese corporate research product: Plus Alpha. The two speak Japanese and have decades of experience working in Japan, but had somehow ended up in Hong Kong. Gavekal decided to bring them on board to help readers navigate Japan’s potentially more attractive waters (after underperforming for 20 years, will Japan really continue to underperform for the next 20?). Behind this decision lies our belief that:
• On a macro basis, what happens in Japan over the coming years will have global repercussions (unlike the past decade, when investors could safely afford to ignore Japan).
• Japan Inc. is going through an important (if slow) transformation.
• Japan is at the forefront of a number of highly disruptive technologies.
• If one wants to understand the forces reshaping Japan, one has to go there. Failing that, the next best thing is to have someone (with plenty of experience and who speaks Japanese) go there for you.
Plus Alpha aims to identify the factors that will drive a company’s fortunes and then target price levels based on chart patterns. This is basically what Japanese retail investors (almost 40% of the TSE first section turnover in 2013 and 80% of the second section) do today—so it could well pay to join the herd! After all, Japanese investors invented charting 300 years ago, so we should not be surprised that technical analysis can be such a powerful indicator of directional forces in the Japanese stock market.