The euro had Mario Draghi’s pledge to do whatever it takes to support the currency. The dollar had Ben Bernanke’s pledge to keep short-term interest rates extraordinarily low for an extended period.
And now the yen has an “unlimited” loan program from the Bank of Japan that is looking more truly unlimited.
With Japanese GDP growth unexpectedly slowing to an annual 1% rate in the fourth quarter and with the Japanese consumer facing an increase in the national sales tax to 8% from 5% in April, Japan’s central bank today extended its unlimited loan program for another year. The program, which had lent 5.1 trillion yen ($49.8 billion) in low-interest cash to banks since December, had been scheduled to expire at the end of March. At the same time the bank loosened a limit on how much “unlimited” money a bank could borrow. Previous rules restricted a bank to borrowing cash equal to its net increase in lending. Now banks will be able to borrow twice the amount of any increase in lending.
The central bank also slightly increased the size of its monthly purchases of Japanese government bonds to a range of 6 trillion to 8 trillion yen from a target of approximately 7 trillion yen a month.
Today in Tokyo the Nikkei 225 stock index closed up 3.13%. Financial and real estate stocks were the big winners. In the financial sector Mitsubishi UFJ Financial Group (MTU) rose 5.03% and Sumitomo Mitsui Financial Group climbed 5.0%. (Mitsubishi UFJ Financial Group is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ) In the real estate sector Heiwa Real Estate gained 4.13% and Mitsui Fudosan advanced 3.31%. The yen fell against the dollar by 0.4% to 102.34 yen to the dollar.
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 may or may not now own positions in any stock mentioned in this post. The fund did own shares of Mitsui Fudosan as of the end of December. For a full list of the stocks in the fund, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
Shares of Mitsubishi UFJ Financial Group (8306.JP in Tokyo or MTU in New York) kept on tumbling today despite unexpectedly positive earnings for the third quarter. Net income climbed to 255 billion yen ($2.5 billion) in the three months ended on December 31. That was a 5.4% increase from the December quarter of 2012 and beat the average estimate of 200 billion yen by analysts surveyed by Bloomberg. The bank is now 86% of the way to its profit target for fiscal year that ends on March 31 2014.
So why is the stock down 12% from December 31 to the close on February 3? And why does it look poised to fall some more in the short term? (Mitsubishi UFJ Financial Group is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ At the $5.88 February 3 close the ADRs traded less than 1% below my original March 26, 2013 purchase price of $5.92. I’m leaving my target price at $7.10.)
The problem is worry about the bank’s exposure to the sinking Japanese stock market and brutally low loan margins. Read more
When we checked in with the global economy last week, the numbers had raised questions about growth in developed economies. A pick up in growth in the world’s developed economies is supposed to offset a dip in growth in the developing world in 2014.
A parade of economic data this week will go a long way to confirming or refuting those worries.
In the U.S. consumer spending climbed 0.4% in December on top of a 0.6% increase in November. The November increase was the largest gain in five months. But consumer incomes didn’t show a comparable increase as salaries and wages came in close to flat for December. That brought income growth for all of 2013 to 2.8%, the weakest performance since an actual decline in 2008 of 2.8%. The anemic growth in incomes raises questions about the sustainability of the growth in consumer spending. If you’re an optimist about 2014, you believe that job growth will add to consumer income. A belief in job growth in 2014 depends, in turn, on a belief in increasing global demand for U.S. goods and services, and continued strength in housing and auto sales.
In Europe the latest data show unemployment in the EuroZone remained stuck at 12% in December and inflation actually moved slightly lower to 0.7% in January. Read more
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