Bank of Japan's Tankan points to strong recovery (Part 5 of 6)
Liquidity and Japan’s corporations
The below graph reflects the high level of liquidity held by Japanese corporations (the green line, left axis). The blue line (left axis) reflects the low expectation that interest rates on loans will rise anytime soon, as Japanese corporations have been deleveraging into a low-growth domestic economy for decades. The yellow line reflects the willingness of Japanese banks to lend—nearly the best levels seen since 1998. With ultra-low rates, ultra-high cash levels, and growing corporate profits in Japan, this data would suggest the growth of a positive environment for Japanese equities.
Nikkei leads banking data
As the above graph reflects, the Japanese equity market leads and outpaces the banking data. The banking data suggests that banks are in a good position to extend loan growth. The recent pick-up in Japanese corporate profits suggests that the corporations are in a better position to borrow. The rise in the Nikkei the past year reflects the increase in corporate profits, due to the weakening yen. Though the Nikkei currently stands 11% below its May peak this year, it’s still 67% above its 52-week low. The modest 11% retracement of the Nikkei shouldn’t give investors alarm just yet, as Abe-led reforms are just starting to manifest themselves in the above economic data. In the near term, further declines in the Nikkei are likely to follow the US debt ceiling debate. While “Abenomics”-led reforms seem to be partially mitigating the downside risk of a softening US economy, a positive resolution in the United States would likely reignite the 2013 Nikkei rally.
As 2013 progresses, investors could see a continued outperformance of Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.” Plus, as Japan pursues unprecedented monetary expansion and the US Fed ponders monetary tightening, Japanese equities could also outperform broad US equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), State Street Global Advisors Dow Jones Index SPDR (DIA), and Blackrock iShares S&P 500 Index (IVV).
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