I’ve been VERY wrong about the Japanese stock market

The Liberal Democratic Party retook control of the national government in Japan late last year on a platform of massive monetary stimulation aimed at shocking the economy out of its quarter-century of torpor.

Most economic effects have been as expected.  The ¥ has lost about a quarter of its value.  This has given export-oriented industries a big boost.  The price of imports has risen by enough, however, that the overall effect of devaluation on Japan has been slightly negative so far.  The trade balance will doubtless improve as Japanese citizens adjust to the tremendous drop in their standard of living that the devaluation has brought about.

Where I’ve been wrong has been in handicapping the behavior of the Japanese stock market.  In the only other recent episode of a big fall in the ¥, the Topix index (Tokyo large caps, the index professional investors use) rose as the currency declined, but only by enough to keep a dollar-oriented investor from losing money.  Yes, export-oriented stocks did better than Topix, but the overall index was unchanged in dollar terms.  I thought something similar would happen again.

Not this time, though.

Since the Abe administration took office and made it clear it would carry out its campaign promise, the Topix is up by 66% in local currency terms, meaning a dollar-oriented investor in the index has made a 25% gain.  Buyers of down-and-out consumer electronics firms like Sony have made twice that.  The long-Topix, short-¥ trade has made a killing.

As I see it, the rise in the Topix has been driven by foreigners.  Locals–never, in my experience, the canniest of investors–have  been mostly using the opportunity offered by devaluation to declare victory in their foreign investing forays and are bringing money home to put into things like real estate.

Press reports indicate new investors in Japanese stocks, including high-profile Western hedge funds, believe very strongly that the change in money policy also heralds a new era of openness to structural economic reform by Tokyo, and that foreigners will be allowed to play a significant role in the latter process.

My view, based on almost 30 years of watching Japan, is that Tokyo insiders regard devaluation as a substitute for reform, not a precursor.  I’d point to the experience of former Prime Minister, Junichiro Koizumi, who was given an overwhelming electoral mandate for reform but who resigned as PM after five mostly fruitless years (2001-2006) of trying to effect change.  As soon as he left, the Diet immediately began to reverse the progress he was able to make.

For Japan’s sake, I hope I’m wrong again.  But I’m not willing to bet on the possibility.  As for the new wave of foreigners, I find it hard to figure whether they have a much more sophisticated read on the political process in Tokyo than I do or whether they’re completely clueless.  Given that reversal of the deep social/political aversion to disruptive change should make me wildly bullish about Japan, in some sense I must think the latter is more probable.  My official position, though, is that I don’t choose to bet.



Is the US the new Japan?: stock market implications

the Lost Decades

Today, I’m going to expand on yesterday’s post by writing about features of the “Lost Decades” in Japan that I think might be repeated in similar circumstances elsewhere.

Before I start, however, I want to make two points:

–I don’t think the US is the new “Japan”;  the EU would be a better candidate, in my opinion, based on its behavior toward its banks, its money policy regime and the way many countries intrude into the workings of their equity markets.  But I don’t think it’s anywhere close to being another Japan, either.

Instead, I’m reading the current downdraft in world markets as an adjustment to two realizations:

that economic growth in the US and EU will potentially be much slower in the next two or three years than in 2009-10, and

that no more government support for markets is forthcoming.

The removal of the implicit safety net is the bigger deal, to my mind.  I’ve been thinking–and writing–for a long time that the slow growth/high unemployment problem is a social and political one that won’t affect corporate profits much.  I still think so.

–To (my) Western eyes, the Tokyo stock market was a very peculiar place twenty-odd years ago.  Back then, the government was actively involved in controlling the stock market, in much the same way that governments typically control their bond markets.

For instance:

at times, Japanese brokers were not permitted to accept sell orders for domestic commercial banks–at least from foreigners.

Large amounts of trading were done in specially segregated trusts, to make it clear that the parties were not disrespecting one another by liquidating stockholdings established to cement business relationships. These tokkin “portfolio managers” typically worked in large smoke-filled rooms that housed scores of them, all trading off price movements posted on large electronic “scoreboards” erected along one wall.  No research, no portfolio planning–just trading on hunches or “hot” tips.

Women were legally barred from purchasing warrants (don’t ask me why).

If you want to see something really weird, read my post on tobashi.

Despite these unique quirks, I think there are aspects to the Japanese experience that I think would apply elsewhere.  And, of course, it’s always good to think out alternate scenarios, just in case they become more probable, or because you find your initial assessment was wrong.

Three  factors stand out to me:

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