Could Abe-nomics actually work in Japan?
I think the odds are still against the economic program of Prime Minister Shinzo Abe in the long run, but the March numbers on consumer spending are still startling. Consumer spending in Japan was up 5.2% year over year in the month as Japanese households have momentarily forgotten fifteen years of deflation. Economists are now projecting that consumer spending will help drive the Japanese economy to a 2.1% annual growth rate in the June quarter of 2013.
Up to this point the argument for owning Japanese equities was the weak yen and the equities to own were shares of Japan’s big exporters such as Toyota Motor (TM).
As the Bank of Japan bought tens of billions in bonds and other assets every month in an effort to revive growth in Japan and to create inflation, it would flood global financial markets with so many yen that the price of the Japanese currency would fall. That would make Japanese goods cheaper to consumers who paid in dollars or baht. Japanese exports would also get a boost to revenue when sales in stronger dollars or won were translated back into weaker yen for corporate reporting back home.
Now, though, if the Japanese domestic economy is actually going to show higher growth because of Abe’s program, then investors should add a taste of domestic Japanese companies to their portfolios too. That’s actually more difficult than adding shares of exporters. The biggest Japanese exporters are familiar global names and their shares trade as ADRs (American Depositary Receipts) in New York.
Japanese companies with a domestic focus are certainly less familiar and most of them trade only in Tokyo. At this point, with only one month’s data to support the idea that Abe-nomics might work, at least in the short run, you may not think it’s worth the effort to dig out information on these names or figure out how to buy them.
But I do have one idea that has exposure to both the weak yen and the domestic growth scenarios. Seven & I Holdings (3382.JP in Tokyo.)
The company operates 48,000 7-11 stores around the world. Only about 15,000 of those are in Japan. The other 31,000 give the company big exposure to the weak yen story. Sales from Indonesia and the United States, for example, translate into more yen on the corporate financial statements back home.
But the company is also one of the largest retailers in Japan with its 15,000 7-11 stores and its Ito-Yokado, Sogo, and Seibu chains of department stores. If the Japanese shopper is going to be spending more, there’s a good chance that spending will take place at a Seven & I property.
The stock has certainly had a good run in the last year—it’s up 57% in the last 12 months—but I calculate a target price about 15% above the May 1 close at 3730 yen.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares in Seven & I as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
On January 16 Japan’s Nikkei 225 index fell by 2.6%. That was doubly surprising. First, because the Tokyo stock market has been on such a roll—up 25.6% from November 14 to January 15 and 9.4% from December 21 to January 15. And second because the “cause” of the drop was a series of absolutely innocuous remarks by a member of the Japanese Parliament (who pointed out that a weaker yen wasn’t great for Japanese consumers) and two members of the Abe cabinet (who noted that a weaker yen wasn’t good for all Japanese companies.)
That was enough to send Japanese stocks down 2.6% on the day?
Welcome to the wonderful world of hot money, 2013-style. So far in 2013 we’re looking at a market that doesn’t have any confidence that the trend of this moment will be the trend of the next moment. And that is, therefore, constantly sloshing toward the opportunity of the minute or away from the possibility that a trend has peaked. I think these sloshes will make emerging markets—with their smaller market capitalizations than the United States, Europe, or Japan—especially volatile. Which, since these are the markets that look poised to do best in 2013, makes for some very tricky footing for investors in the year ahead.
Let’s take a slightly more detailed look at what happened in Japan and then see how these dynamics apply to the rest of the global stock market. Read more
Nothing seems out of bounds for the new Liberal Democratic government of Shinzo Abe in its determination to blast Japan out of its most recent recession. Besides a huge extra budget emphasizing infrastructure spending and pressure to force the Bank of Japan to set a 2% inflation target that would guarantee massive monetary stimulus, the new Prime Minister is considering a fund that would buy foreign securities such as U.S. Treasuries. The fund could total 50 trillion yen ($558 billion), according to Nomura Securities. Buying foreign assets in that amount would be certain to further weaken a yen that has already dropped by 12% in the last four months.
Bond buying of this volume by Japan could also turn around what has been a falling market for U.S. Treasuries. Treasuries, as tracked by the Bank of America Merrill Lynch U.S. Treasury Index, have begun the year by falling 0.5%. The Federal Reserve’s purchase of $45 billion in Treasuries a month hasn’t been enough to make up for falling demand from China and Europe for the safe haven of Treasuries.
Economists, in fact, have been getting less bearish on Treasuries for 2013. The median forecast of economists tracked by Bloomberg is that the yield on the 10-year Treasury will climb to 2.27% by the end of 2013. That’s a big jump in yield (and remember bond prices fall as yields rise) from the current 1.86% yield. But it’s much more bullish than economists were this summer when in July the forecast, according to the Bloomberg survey, called for 2.7% by the end of 2013.
At the same time forecasts for the yen are predicting a weaker currency with the yen, currently at 89.45 to the dollar, falling to 95 or even 100 to the dollar.
Even without the latest plan from Abe, Japan is on a path to again become the biggest holder of U.S. Treasuries. Through October Japan had raised its holdings of U.S. Treasuries in 2012 by 12% to $1.13 trillion. That’s not far behind China’s $1.16 trillion and, with China cutting its holdings, the next report, due on January 16, could show that Japan is once again the United States’ biggest creditor.