“If ‘Abenomics’ were a car, its wheels would be coming off.” That’s the opening of an opinion column in the Wall Street Journal.
“Are we witnessing the failure of Abenomics?” That’s the headline on another market report, this time from the Globe and Mail.
Let’s see. Japan’s prime minister, Shinzo Abe, came to power on a promise to weaken the yen, and revive the Japanese economy.
This time last year, the yen was trading at around 80 yen to the US dollar. It’s now hovering below the 100 mark (in other words, it has weakened drastically). And despite recent falls, the Japanese stock market remains by far the best performer (in US dollar terms) of all major markets this year so far.
If that’s deemed a failure, we hate to imagine what success would have looked like…
Japanese bears are a hard bunch to convince
The Japan bears are loving the recent volatility in the market. To them, it just proves what they’ve always said – that Japan will always be the most disappointing market in the world.
As far as I’m concerned, it’s nice to see the sceptics out in force so rapidly. It just shows the deep level of hostility to Japan, despite its fantastic performance so far this year. That means there are plenty of bears who remain to be convinced of its merits.
They should try looking at the economic data. As Jonathan Allum of SMBC Nikko Capital Markets notes, the Citigroup ‘economic surprise’ index for Japan is on the rise. In other words, most economic data releases are beating forecasts, and surprising on the upside. Good news is returning to Japan.
You only need to look at the latest revision of first quarter GDP data. Annualised growth rose from an already very decent 3.5% to 4.1%. Bank lending continues to tick higher. And consumer confidence is at a six-month high.
Now, as we’ve pointed out regularly in the past, economic data and stock markets have little or no relationships with one another. But usually this relates to rapidly growing economies disappointing on the equity front, or slow, lumbering economies delivering surprisingly good stock market returns.
Instead, Japan is going from being an ongoing economic underperformer to seeing a far more optimistic outlook.
So why the wild swings in the Japanese market? That 7% drop we recently saw in the Nikkei wasn’t as unusual as the efficient market mob would have you believe. But it certainly wasn’t your typical day-to-day move either.
The obvious answer is that stocks had moved too far and too fast. When the Federal Reserve started having wobbles about continuing quantitative easing, Japan was the most obvious market to start taking profits on. That’s the explanation I’d pick over most others.
However, the team at RiverFront investment group (courtesy of David Fuller at fullermoney.com) also make an interesting point about how markets react when long-term expectations change dramatically.
They take the example of 2008. Now that we all associate 2008 with the dark days of the credit crunch, it’s easy to forget that at the start of the year, most investors were fairly optimistic. Believe it or not, the idea that subprime would be contained was still widely accepted.
The realisation that things weren’t as cheerful as they looked only crept in gradually. And as investors started to wake up to the fact that the US economic outlook was much darker than they had expected, US stocks saw similar volatility.
“During that time, as stocks were adjusting to significant downshifts in growth and earnings, there were several weeks that stocks rose 5-10%, even as the market remained in a severe downtrend.”
Something similar is happening to Japan now, reckon RiverFront – but on the upside. “We think Japan is experiencing the opposite situation – an upgrade to earnings and growth expectations as ‘Abenomics’ increasingly appears to be working.”
Keep buying Japan
Abenomics is a long-term strategy – or at least, longer than next week, which is about as far ahead as the markets currently think. Investors seem to have been disappointed that the Bank of Japan hasn’t been doing more recently to keep the yen from strengthening, or to keep stocks rising at their recent rate.
But it’s easy to forget these days that the job of central banks is not solely to keep stock markets rising. You can’t expect them to intervene with all guns blazing every time there’s a ‘down’ day. Nor should they.
In short, we’re happy to hang on to Japan and to keep adding more. It’s not easy to swallow this kind of volatility with a smile on your face, but that’s why you drip-feed money in, so that you get to buy on the dips as well as when the market is soaring.
It’s also another good reason to be wary of hedging your yen exposure – if you don’t hedge, it means that a strengthening yen provides a natural cushion to any losses you suffer on the stock market swings.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.
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