Will Japan’s Nikkei see another bull market in 2014?
Japan's export growth: Will General Motors' loss be Japan’s gain? (Part 8 of 9)
Japan’s blue chip exporters—taking a breather, or out of gas?
The below graph reflects the performance of Asian equity ETFs since the election of Japan’s new Prime Minister in November 2012. The Japanese ETFs—DXJ & EWJ—performed very well as the currency weakened under new policy initiatives. Meanwhile, both Korean and Chinese ETFs—EWY & FXI—have been flat, with China still in a slightly negative territory. This article considers the prospects for these main Asian ETFs to break out of the doldrums in 2014, as Japan’s automakers and other exporters could benefit from a weakening yen.
Bank of Japan—further easing is possible, if consumption tax is not offset by wage gains
As discussed in Part 6, a lot is on hold in Japan right now. Major initiatives have just been put into place and will roll out over 2014. Simply put, Japan is very much in rollout mode. As the above graph reflects, investors bought the roll out idea in 2012. Interestingly, the Japanese investors were net sellers during this time, while the net buying came from foreign investors. This might suggest that the Japanese are sellers of Abenomics, and that the foreign investors were willing to take a speculative bite on Abenomics. It is not hard to understand why the Japanese have been skeptical of change they can count on. Despite record profits—as in the U.S.—wage growth has gone nowhere. The wealth effect from a Nikkei at 15,000 is almost nothing, while the U.S. rally has seen household net worth hit records—$80 trillion, or about 500% of the U.S. GDP—not too shabby if you own a lot of equities.
The U.S. bull market, Asian doldrums, and Japan’s potential edge
Despite the baked-in skepticism at home, the Abenomics wild card remains in play: massive fiscal deficits and massive quantitative easing will continue in 2014. Japan has been running a trade deficit for 20 months now—with February data coming in at 800 billion yen versus 600 billion yen expectations. While economists focus on the negative impact this could have on the Japanese economy near-term, they seem to be ignoring the effect this could have in the longer term if the Japanese yen weakens.
In the long run, Japan needs a weaker yen. If the trade deficit drags too much on growth in 2014, the Bank of Japan seems poised to facilitate. Should we go into the third quarter with soft GDP data, keep an eye open for more bombshell measures from the Bank of Japan toward the end of the year. Even if GDP data does not look great, a weaker yen should support net corporate profits and the equity markets overall. With this background, Japanese automakers were able to raise wages in 2014. Perhaps this virtuous cycle of a weak yen and wage growth will support further recovery in Japan.
To see how the U.S. equity bull market could spill over into Asia later in the year, read Part 9 of the series.
For an overview of the April 1, Bank of Japan Beige Book on Japan’s economic outlook, read Bank of Japan Tankan supports a 2014 equity rally in Japan.
Japan’s equity outlook
As 2014 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). Plus, as Japan pursues unprecedented monetary expansion, and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform the broad U.S. 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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