Japan: Data and Flows

Early Tuesday in Tokyo, Japan will announce revisions to Q4 GDP.  A downward revision to business spending risks shaving the initial estimate from a contraction of 1.4% at an annualized rate to 1.5%.  Regardless, the key takeaway is that the world's third-largest economy contracted in two of the four quarters last year.   Recall Initially, the consensus was for a 0.8% annualized contraction in Q4.  The anticipated revision means the contraction was nearly twice as much as initially expected.

Local press report spurred expectations that the Abe government was considering another supplement budget.  However, rather than come at the end of a fiscal year, as they have consistently since 2011, the thinking was this new one could be front-loaded.  Prime Minister Abe denied the reports over the weekend.

Many investors have expressed concern about central banks losing credibility.  For others, the point is that monetary policy has reached a point of diminishing returns.  A few days after telling a television audience that negative interest rates were not under consideration, BOJ Governor Kuroda adopted negative interest rates on a 5-4 vote.  The term of one of the dissents will expire shortly, and the replacement is likely to be more amenable to the Governor.

Nevertheless, Kuroda's assurances that another rate cut is not on the table at this month's meeting (March 15) are taken with a large grain of salt.  That said, we recognize in the criticism of Japan levied at the G20 meeting meant that a follow-up rate cut in March was unlikely.    That does not mean that the BOJ has in fact exhausted its monetary policy.  It simply means further macroeconomic deterioration is necessary for the BOJ to cut rates again.

Such an opportunity may not materialize in Q2. The consensus is for the economy to expand again in Q1 and Q2 at an average annualized pace of 1.3%.  While the rise in oil, and commodity prices more broadly, may boost price pressures, the appreciation of the yen (around 6% on a trade-weighted basis since the end of last year) will likely dampen import inflation.

Foreign investors have been featured sellers of Japanese stocks since late-November.  According to Ministry of Finance data, foreigners have sellers in all but two weeks since then (the first week of December and the first week in January).  In the last eight weeks, foreign investors sold JPY4.29 trillion of Japanese shares (~$38 bln).

On the other hand, foreign investors were buyers of Japanese bonds.  They have bought this year expect for two weeks, and since the beginning of the year, they have bought JPY2.7 trillion (~$24 bln).  Some real money accounts cannot take a naked currency view so to express a bullish yen view, buying a short-term debt instrument is a common tactic.  The total return will be driven by the fluctuation of the yen.

Japanese investors have continued to buy foreign assets.  In the first nine weeks of the year, Japanese investors bought foreign bonds in six of the weeks for a total of JPY3.5 trillion.  In the first nine weeks of 2015, Japanese investors bought JPY2.1 trillion of foreign bonds.    Japanese investors have bought foreign equities in the first nine weeks of the year, according to MOF data.  They have purchased JPY2.1 trillion of foreign shares compared with JPY3.2 trillion in the comparable year ago period.

Meanwhile, since the start of the year, speculators in the futures market have amassed the largest net long yen position since late-2012.   The gross long position has risen from 26.4k contracts (each contract is worth JPY12.5 mln) to 94.1k as of March 1.  The gross short position has been slashed from 113k contracts in mid-November to 34.4k contracts as of last Tuesday.

The dollar reached its high here in Q1 on January 29  near JPY121.70 in the knee-jerk response to the BOJ's surprise adoption of negative interest rates.  The low was recorded (according to Bloomberg) just below JPY111.00 on February 11.  The high since the low was set almost JPY114.90.

Technically, the dollar appears to have put in a double bottom near JPY111.00, but it needs to get above the neckline, which is a trendline with a slight downward slope and is found near JPY114.40 at the end of the week.  If the neckline is overcome, the dollar-yen may be forging a new range.   In our experience, the dollar-yen is often range-bound.  When it looks like it is trending, it frequently is simply moving from one range to another.