While the only topic of discussion for "sophisticated" investors everywhere is when (and if) the Fed will ever dare to reduce its monthly flow injection into US markets from $85 billion to a paltry $75 billion, everyone has forgotten that across the Pacific, for the past seven months the BOJ has been calmly injecting another $75 billion each and every month into the market, with no risk of this liquidity boost ever being tapered (since the broad 2% inflation target relies on ever broader wage increases that will never come). However, much to Japan's chagrin, in the current insta-globally fungible capital markets, over the past five months the bulk of this liquidity has found its way to the US stock bubble, leaving the Nikkei in the dust. As a result, the local Japanese liquidity junkies have started to loudly complain once again, and now the FT reports that "as excitement over the world’s second-biggest stock market has faded, some are now crying out for another jump-start."
In other words: the BOJ must do "moar" to push the Nikkei bubble even higher following its rangebound trade since May.
A bigger problem is that suddenly hope is fading: "The chief Asian investment officer at one major global asset manager says foreign investors are getting increasingly “antsy” with the apparent lack of progress. “Personally, I wouldn’t be a major buyer of Japan,” he says. "If you buy now you are still buying on hope."
Intuitively, one can see why Japan should be worried: while the epic debasement of the Yen - the direct outcome of the BOJ's unprecedented dilution of its currency - had worked to stimulate the "wealth effect" early on, now there is hardly any wealth effect to speak of, while the pernicious consequences of Abenomics, soaring food and energy import costs, are here to stay, and will only get worse especially if Japan is unable to restart its mothballed nuclear power plants.
So without stock gains to at least psychologically offset the price shock apparent everywhere except in rising wages, which instead have declined for 16 months in a row, suddenly Abenomics finds itself trapped. And the only possible resolution it seems is for the BOJ to do even more to offset the languisihing stock market.
Sure enough, the junkies are worried. FT reports:
Money from abroad is still coming in, rising to a year-to-date total of $108bn in the last week of October, as institutional investors start handing out mandates to Japan managers. But having ranked as the best-performing major market over the first six months of the year, Japan has languished in the bottom half of the pack since then.
“The market needs more than mega long-only pension funds accumulating [stocks] on weakness, which doesn’t drive prices,” says Peter Eadon-Clarke, head of Japan research at Macquarie Securities in Tokyo. “We need those aggressive macro traders looking for a mini-replay of the BoJ’s major loosening at the beginning of this year.”
With or without another nudge from Mr Kuroda, something needs to happen, say analysts.
The rally that began exactly one year ago, when former prime minister Yoshihiko Noda called the election that would sweep Shinzo Abe to power for a second time, has not come close to reclaiming its peak of late May, when fears over US tapering jolted world markets.
And so the worst-case scenario for Japan has materialized. Because while the Fed recently understood that flow is all that matters, Japan which continues to provide copious amount of monetary flow each month, has found that said flow not only is not doing much to boost its own stock market, but is promptly departing for greener pastures, mostly found in the collocated servers in the NYSE facility in Mahwah.
All Japanese attempts to redirect this flow direction have so far failed:
The awarding of the 2020 Olympics to Tokyo in September did not provide much of a lift. Neither did the government’s October decision to increase the consumption tax, which had been seen as a test of Japan’s determination to put its state finances in order as it tries to haul itself out of more than decade of mild but persistent deflation.
A good first-half earnings season thus far has not roused investors either. As Morgan Stanley notes, only those companies beating forecasts by more than 10 per cent have seen a surge in their share prices.
The TS multiple – or the Topix index divided by the S&P 500, described by Mizuho strategist Yasunari Ueno as “a report card on ‘Abenomics’” – has recently dropped below 0.7 times, and continues to fall.
“Overseas investors are now less inclined to put their faith in further progress,” he says.
Oh no, not loss of fiath, pardon faith. How can the fanatic monetary religion function if the faith in future upside is gone? Well... enter the BOJ.
So eyes are turning once more to the BoJ, where the governor has promised to supply more stimulus should the economy weaken next April when taxes go up. But some say the central bank cannot wait that long.
A pledge to buy even more assets at the BoJ’s meeting next week could weaken the yen once more, pushing up profits at exporters, and would send the broader message that Japan is absolutely serious about emerging from deflation, says Mikio Kumada, Hong Kong-based global strategist at LGT Capital Partners Asia, which manages the assets of the House of Liechtenstein.
But this and other “third-arrow” structural reforms need to be seen to be advancing, say analysts, especially in light of the Rakuten row. Last week Hiroshi Mikitani, the founder of Japan’s largest online shopping site, complained that a government decision to exclude some over-the-counter medicines from an internet sales law was a victory for vested interests and suggested the Abe administration was ducking difficult reforms.
Even cries for moar, moar, moar may fall on deaf ears: because first it was the Rakuten CEO saying Abenomics is failed, and now such statist dignitaries as the CEO of Allianz are chiming in saying that "Abenomics will fail without third arrow." What a funny name to give to a stuck CTRL-P combo. As for any actual reforms: forget it - as the Fed whistleblower yesterday so eloquently described, "Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy." The same goes for Japan.
But even if the BOJ relents, the one commodity that is in increasingly short supply in Japan is hoap pardon hope: hope that the BOJ, and Abe, have any idea what to do besides diluting the currency even more.
The chief Asian investment officer at one major global asset manager says foreign investors are getting increasingly “antsy” with the apparent lack of progress.
“Personally, I wouldn’t be a major buyer of Japan,” he says. “If you buy now you are still buying on hope.”
This impatience bothers some market veterans. Japan has always been a slow-burn story, says Rupert Kimber of London-based Tiburon Partners, who runs a £1.5bn ($2.4bn) open-ended fund.
In the meantime, as we predicted all along, Abenomics is actually imploding from within:
The growing appeal of the Japanese market has little to do with the return of Mr Abe, he says, and everything to do with the likes of Japan Tobacco, which said last month it would shut plants and cut 15 per cent of its domestic workforce to protect profits.
“If the Japanese labour market is so rigid and unmovable, those things aren’t possible, are they?”
In short: as a result of its decision to double the monetary base, Japan delayed the inevitable thanks to the distraction of a surging stock market, but now that the surge is over, attention has returned to the flaming wreck that is Japan's economy. And while its bond yields have been stable for the time being, this will be the final domino to fall before Abe is once again carted off stage left following another epic bout of diarrhea as Abenomics officially fails, and the sun finally sets on the radioactive land of the formerly rising sun.
It is all, as Kyle Bass foretold many times before, just a matter of time.