China to Japan: Pass the Batton Mate

David Pilling, definitely the man to watch at the FT ( sorry Brad ) has some sound sense for us about Japan/China relations. Meanwhile I'm afraid I don't buy at all the thesis that China is good news for Latin America - my god why do I have to be so contrarian, anybody got a good astrological calendar handy, I must have been born under a bad, bad moon:

Japan's economy may still be four times bigger than China's, but some time ago it passed the baton marked "economic powerhouse" to its large northern neighbour. China's economy is ripping along at 8-10 per cent a year. Japan's is shrinking in nominal terms. China is attracting record foreign direct investment, Japan a relative trickle.


Worse, China's gain is Japan's loss. China is swamping Japan with cheap exports, fuelling its seemingly endless deflationary descent. Japanese manufacturers, unable to compete, are fleeing to China, causing the "hollowing out" of domestic industry and pushing unemployment towards post-war highs. Clearly, the future now leads to Beijing, Shanghai and the Pearl River Delta. Tokyo, Osaka and Kobe are of the past. But there's a feeling investors with this view may have jumped the gun. Abandoning Japan for China is too simplistic. Far from being a threat to Japan's economy and companies, China may be Japan's way out of a fix. The two countries, bitter rivals for years, could be highly complementary.

This is the basic thesis of a new note by Goldman Sachs - entitled Friend, not foe - the latest in a series of Japanese research that seeks to redress widespread misconceptions about the Japan-China relationship. Take trade. Quite contrary to common perception, Japan is not being swamped by Chinese exports, but is running a trade surplus with China - about $1.5bn in 2002. Many of these exports are of machinery and inputs to Japanese companies operating there, some of them bound for re-export to Japan or for shipment to third countries. But Goldman's says the pattern is shifting, with more Japanese goods being consumed within China.

China has recently overtaken the US as the largest exporter to Japan. But at about 1 per cent of gross domestic product, many think it is far-fetched to blame cheap Chinese goods for Japanese deflation. To the extent that these imports change the relative price of goods, such price falls may be a good thing. Most imports from China are of labour-intensive goods, with 60 per cent concentrated in textiles, food and basic materials. Japanese exports to China are sophisticated, capital intensive goods. In other words, both countries are producing and exporting according to their comparative advantage - something economists would say is mutually beneficial.

So how can this work for the investor? One way is to buy shares in Japanese companies with smart investments in China. Again, contrary to perception, Japanese companies have been relatively slow on to the Chinese mainland, leaving room for further moves. In 2001, Japanese foreign direct investment into China rose 64 per cent on the previous year to Y181bn; officials think it increased sharply again last year. According to a recent survey by the Japan-China Investment Promotion Organisation 82 per cent of Japanese investors in China say they are already profitable. Robert Feldman, senior economist at Morgan Stanley in Tokyo, says many Japanese companies have been successful at raising profit margins by investing intelligently in China and other low-cost producers. As tariff barriers come down, companies that export to China also stand to benefit. Japanese companies struggling as capital investment slides at home could be in for a big fillip.
Source: Financial Times
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Japan: Yet Another 20 Year Low?


Yes I'm afraid so. The only point of interest seems to be when will it stretch to become a 21 year one. But seriously folks, amidst all the talk that the Japan bubble burst at the end of the 80's it's easy to forget that during the last two years - effectively since Koizumi came to office to put things straight - the Nikkei is down 45%. If there is such a thing as a wealth effect, then this is indeed another enormous deflation in asset values, and still it continues.... It is extremely difficult in the face of this to understand how some commentators (like Morgan Stanley's Robert Alan Feldman, or, in his way, Richard Katz) can continue to be so upbeat on the 'reform' possibilities: by the way I'm in the proces of reading Katz's Japanese Phoenix he makes some interesting points and I'l try and blog something next week.

Tokyo shares fell below their recent 20-year low on Friday as investors reacted with dismay to Sony?s failure to reach its full year profit target. Sony shares were untraded as sell orders piled up at Y3,220, 13 per cent below the stock?s Thursday closing price and at the Tokyo exchange?s limit for a single day fall. The Nikkei average was down almost 2.2 per cent at 7,685.28 by midday, with the Topix index off 1.6 per cent at 781.92. Sony announced on Thursday that it made a loss of Y111.1bn in the three months to March, and fell well short of its profit target for the full year. Some analysts expressed disappointment that the media and electronics giant had not revised its forecast down as it became clear sales at its electronics division were falling away. The gloom surrounding the technology bellwether sent all technology exporters lower. NEC was down 2.3 per cent at Y346 after the company on Thursday it stayed in the red for a second consecutive year, but narrowed its net loss to Y24.5bn and forecast a profit of Y30bn for the coming year. Toshiba, which is set to announce full year results after the market close on Friday, tumbled 4.3 per cent to Y309. Matsushita, the electronics maker behind the Panasonic brand, also dropped 4.3 per cent, to Y885, ahead of reporting on Monday.The motor industry was not immune to the darkening sentiment, with Mitsubishi Motor falling 5 per cent to Y245 even though the company on Thursday reported record net profit of Y38bn thanks to successful restructuring. Honda was down 5.2 per cent to Y3,650 ahead of its earnings report due after the market close.
Source: Financial Times
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Japan: The Rush to Bonds Continues

While the floor continues to fall out of the equity markets, the queue to buy bonds lengthens. Consequence: the yield on ten year bonds hits another historic low, and deflation expectations become more entrenched than ever.

The yield on the benchmark 10-year Japanese government bond hit a historic low on Monday, as investors flocked to the safe haven of JGBs after the stock market closed at a new 20-year low.


The 10-year JGB was up 0.23 at 100.42, pushing the yield down 0.025 to 0.655 per cent, a record low. The key 10-year JGB futures contract was down 0.03 at 143.09. The yield on the 20-year JGB also fell to a record low of 0.995 per cent.

Japanese stocks plumbed a new 20-year low on Monday, as downward pressure was exacerbated by pension-fund selling. The benchmark Nikkei 225 average was off 0.8 per cent to 7,795.49, as shares continued their decline for a fifth straight session.

Investors are looking ahead to Thursday's Y800bn auction of 20-year JGBs, with an expected coupon of one per cent. Demand for the issue is expected to be robust, amid a dearth of other attractive investment opportunities.
Source: Financial Times
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Japan: Nikkei Continues to Plumb the Depths


Another new twenty year low, and five straight sessions going down. Little Easter cheer from Japan.

Japanese stocks plumbed a new 20-year low on Monday, as worries regarding the global economy in the wake of the Iraq war ceased to abate. Downward pressure was exacerbated by pension-fund selling.


The benchmark Nikkei 225 average was off 0.8 per cent to 7,795.49, as shares continued their decline for a fifth straight session. The broader Topix index was off 0.9 per cent to 775.61.

On Friday, the Nikkei fell to a 20-year low, sparked by heavy selling by pension-funds, a trend that continued on Monday. Japanese pension funds are set to return a portion of their poorly-performing assets to the state later this year. Many trustees are opting to hand back cash, exerting a steady downward pressure on the market.

In a report entitled, "The Death of Equities?", strategist Masatoshi Kikuchi at Merrill Lynch in Tokyo said: "Japanese stocks have failed to rise, in spite of what looks like a quick end to the war in Iraq. We had expected the market to under-perform, but at the same time be aided to some extent by temporary rallies in the US market on indications of a coalition victory. It appears we were overly optimistic."
Source: Financial Times
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