Savvy Housewives and Mum and Pop Investors

This time Bloomberg has a new angle on all this:

Yen sales by Japanese mom and pop investors this week exceeded professional traders' bets against the currency on the Chicago Mercantile Exchange.

Net short positions on the yen against the dollar, or wagers Japan's currency will fall, reached $1.1 billion among traders using borrowed funds on July 4, according to Tokyo Financial Exchange. Based on estimates of the exchange's market share, the total position of Japanese individual investors is about $19.15 billion, compared with a record $19.07 billion of bets by traders on Chicago's market.

This comparison gives a measure of the scale of what is happening. As they say:

Japanese pensioners, businessmen and housewives are taking advantage of the Bank of Japan's 0.5 percent benchmark rate to borrow yen to buy higher-yielding currencies in New Zealand, the U.K. and Australia. The growing popularity of so-called carry trades has added to declines in the yen, which dropped against all of the 16 most-active currencies in the past year.

and there is more to come:

``The yen will fall further due to the growing presence of those Japanese retail investors,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``Those mom- and-pop investors have invested only 3 percent of their total financial holdings of 1,500 trillion yen in overseas assets. They will invest more.''

In Japan, individuals have opened 664,802 margin trading accounts at brokerages that lend money for currency bets, almost double a year ago, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. The number may exceed 1 million by the end of March, said Kaz Shirakura, senior researcher at the institute.

``The arrival of Japanese households as major investors seems to have affected foreign-exchange markets,'' Nishimura, 54, said in a speech at a meeting at the Brookings Institute in Washington on July 2. ``The gnomes of Zurich were accused in their day of destabilizing markets. The housewives of Tokyo are apparently acting to stabilize them.''

Japan's Leading Index

Well, the latest reading on the leading index seems to be causing some controversy. Earlier this week the Tankan came in with an unexciting but basically positive reading.

The Bank of Japan's closely watched Tankan survey of business confidence showed the large manufacturers' diffusion index, which subtracts pessimists from optimists, unchanged at +23. However, the index for medium and small manufacturers fell three and two points respectively to +13 and +6, suggesting some weakness in companies less exposed to export markets.

On the other hand wages continue their downward path:

Separate figures from the ministry of health and labour showed that total cash earnings fell 0.6 per cent in May from a year earlier, their sixth consecutive monthly fall. The numbers underlined the seeming paradox of Japan's "no-wage recovery" in which employers, even those making record profits, have been slow to pass on the benefits to workers.

That partly reflected the retirement of high-earning baby boomers, who were being replaced by women, pensioners on cheaper contracts and previously discouraged jobseekers returning to the labour market, economists said. Lehman Brothers said there were some indications in the Tankan that the labour market could tighten again, including strong plans for graduate hiring and a prediction of labour shortages in coming months.

and also note this part:

Mr Jerram said labour market data included in the Tankan survey showed that employment conditions had stopped tightening for the first time during the five-year recovery. That could be a temporary blip, he said, but it suggested that the bank might have to rethink its central assumption that tightening labour conditions would inevitably spark higher wages and prices - one justification for its pre-emptive rate rises.

The stock market was not very impressed with the implications for the property and construction sectors:

Property stocks continued their downward trend, hit this time by the tankan survey, which pointed to weakness for the sector. Mitsui Fudosan, Japan’s biggest property company, sank 1.2 per cent to Y3,420 while Mitsubishi Estate, its largest rival, slid 1.2 per cent to Y3,310.


Meantime back to Bloomberg and the leading index:

Japan's broadest indicator of the outlook for the economy signaled for a seventh month that the longest expansion in more than 60 years may slow.The leading index was 30 percent in May, the Cabinet Office said today in Tokyo, lower than the 40 percent median estimate of 27 economists surveyed by Bloomberg News. A number below 50 indicates the economy may cool in three to six months.

As I say by no means all economists are agreed on what this means, but looking closely at this and the details of the Tankan, it is hard not to reach the conclusion that the Japanese economy is slowing at this point, and that in this environment the BoJ will be very hard pushed to raise rates.

This impression is also strengthened by the news that Moody's is contemplating upgrading their Japanese sovereign debt rating. It isn't so much the fact that they are thinking about this that is important, but rather the reasoning behind the news:

Prime Minister Shinzo Abe has pledged to balance the budget by 2011 by cutting spending and possibly raising the national sales tax from 5 percent. The government will probably reduce bond sales for a third year in the 12 months starting next April, Chikahisa Sumi, director of debt management policy at the Finance Ministry, said last week.

So Japan is going to raise taxes and practice fiscal tightening. If we examine what is happening on the domestic economy front, which may well already be noting the end of the monetary easing policy, and the direction government policy on the fiscal front may evolve after the elections, then it is very hard to see the BoJ raising much, and indeed in the mid-term we may well be moving in the opposite direction.

Playing the Waiting Game in Japan

(cross-post from Alpha.Sources)

As I reported a couple of days ago on Japan the next few days would see the release of a slew of economic indicators pointing forward to the future course from the BOJ in Q3 and Q4 (with the nature of the just released data I find it very unlikely that the BOJ will jump-start markets with a surprise raise in July). These 'few days' have now passed and we can now do some kind of status. I managed to slip in, as an update, the report on industrial production in my post linked above. Generally, the result was disappointing from the point of view of expectations and given the trajectory of the numbers (see graph by Edward here) I noted the following;

Now, the interesting thing is I think that it could look as if the Q4 2006 capex bonanza could take almost two thirds of 2007 to unwind, especially if the the US economy continues to 'under perform.' If this is the case, the data on domestic consumption will be very important indeed.

To respond to that we might want to check out the recent data on consumption in May (Bloomberg article on both the latest CPI release and consumption expenditures). As reported, household consumption rose 0.4% on a y-o-y basis which indeed extends the increasing throughout 2007 up until May. Yet, 0.4% is not much and compared to last month it marks a relative decline compared to April of 0.7%. In this way I will stick to my prediction stating that despite what many are calling the revival of domestic consumption in Japan it is unlikely that we will push above the 1% threshold on an average y-o-y basis. This goes especially if we use seasonally adjusted data as our primary gauge. The figure below plots monthly changes on a y-o-y basis in consumption expenditures since May 2006.

Turning to inflation prices held steady in May posting a 0.1% decline y-o-y which was the same as the previous month, so Japan is still in deflation it seems. Another somewhat important data point was the inflation figures (core prices) from Tokyo which posted a 0.1% decline in June, its first slide in three months. This does not bode well for nationwide inflation figures in June. The graph below plots (according to the tale of the three inflations) inflation in Japan on a y-o-y basis from May 2006 to May 2007.

So, what does all this mean? First of all I think it has cast serious doubts on the future course from the BOJ. Clearly, the July surprise hike which has been much debated is out of the question I think. Another thing which is politically related is the fact that Fukui is set to step down in March next year. Clearly, he wants to leave the best possible kind of conditions for his successor; the question obviously remains then, will that make him/the BOJ more or less hawkish? A hike in August or September cannot be ruled out just yet I think and much will depend, I think, on the continuous tightening of the labour market (unemployment is stable at 3.8% in May) and whether this will have an inflationary effect. Furthermore, there is of course the headline inflation rate which is set, after a dip in the latter part of 2006, to continue its structural upward trend. Turning to international FX markets the show thus seems set to go on with the Yen reaching new lows fuelling sizzling growth in among other countries New Zealand where a refi rate of 8% is acting like an over dimensioned Yen magnet. I don't condone complacency but at this point and with the current relative benign global economic conditions not pushing up inflation in Japan it is just completely impossible for me to see how the BOJ ever will be able to close the gap to a degree which would make the carry trade unwind. In fact as I have noted before, I believe it is more likely that any narrowing of the interest differential between Japan and the rest of the world will come through the lowering of interest rates elsewhere.

Japan Industrial Production

The latest data on Japanese industrial production have raised some eyebrows. Below I am putting up a quick excel chart of manufacturing and mining output on a monthly basis since April 2006 I have just knocked out. (The raw data can be accessed from here).




The trend should be reasonably clear, and certainly the recent wave seems to have peaked back in December last year. Of course, as Claus was pointing out yesterday not everything is gloom at the moment. But the situation is complex, and for the time being we simply need to keep monitoring the data. It is however hard to envisage a rapid interest tightening process in this environment (especially when you look at this recent US durable goods release).

Japan’s industrial production unexpectedly fell in May from a month earlier, casting doubt on an anticipated rebound in output and raising the hurdle for the Bank of Japan to raise rates in the coming months. Industrial output fell 0.4 per cent in May from April, government data showed on Thursday, much weaker than a median market forecast for a 0.8 per cent rise and marking the third straight month of decline.

The weaker-than-expected reading hurt the yen, which slipped to near 123.35 to the dollar from 123.20.

Manufacturers’ output – the core component of production – is expected to rise 1.9 per cent in June and rise 1.7 per cent in July, the data from the Ministry of Economy, Trade and Industry showed.

Still, the ministry downgraded its view on output, saying it is flattening. That compared with the previous month’s assessment that output was in a moderately rising trend.

Industrial production fell in January-March for the first time in six quarters, but many economists thought the drop was a reaction to a sharp rise in October-December and that output would rebound in April-June.

The May output data may call such thinking into question and heighten worries over Japan’s corporate-sector strength.