| PAST ABW MARKET LETTERS |
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| March 8, 2004 |
Japan's New Secular Bull Market
As anticipated out in our Jan. 26, 2004 piece
(Euro Rethink will help Japan), the US dollar has rallied some 6%. As was pointed out in the Euro
Rethink will help Japan piece, the dollar's rebound has led to a spurt of out performance by the
Tokyo market on very strong trading volume. Both Japan's economy and stock market have overcome
the flat spot seen in the final months of 2003, and, as we pointed out in our December 15, 2003 piece
(Cyclical or Secular Recovery? Market will Tell in Q104), the stock market has given a clear answer
to the "cyclical or secular" question. It's definitely looking for a secular recovery.
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| March 1, 2004 |
This Time May Be For Real, But 2005 Will be Tricky
The global reflation story to date has been predicated
on; a) the FED maintaining its extraordinary "deflation fighting" policy stance, b) the continued
gradual decline of the US dollar, and c) global central banks effectively "sterilizing" any
negative effect on US rates from the dollar's fall with their purchases of US treasuries.
But a wide-spread rally in commodity prices (including gold, industrial metals and even
agricultural products) such as already seen has historically meant an inevitable rise in
bond yields to reflect growing inflation expectations.
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| February 16, 2004 |
Revitalizing Japan: Not Rocket Science, But Execution
On a global relative basis, investor surveys still
indicate that global and international fund managers consider Japanese equities as well as the
yen relatively undervalued. Moreover, the bullish expectations for Japan's economic recovery
were apparently vindicated, as Japan's GDP for the fourth quarter to December 2003 recorded
blowout annualized year-on-year growth of 7%, in clocking the fastest growth since the June
1990 quarter. It also marked the fourth consecutive quarter of quarter-on-quarter expansion.
Moreover, the BOJ seems to be much farther away from any move to tighten monetary policy
than the FED.
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| February 09, 2003 |
Implications of the Nikkei 225, US Bonds Link
The linkage between US long bond yields and the Nikkei
225 has become especially close since 1997. Given this linkage, a sharp rally in Japan would push up
US long bond yields, and vice-versa. Through its forex interventions and resulting purchases of US
treasuries, Japan has been instrumental in keeping a lid on US long bond yields. Because of the
close Nikkei 225/US Treasuries linkage, their buying of US treasuries, while keeping a lid on US
bond yields, is effectively inhibiting the rally in Japanese stocks.
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| February 02, 2003 |
Japan Small Caps: Where Doing Your Homework Pays Off
Historically, screening for deep value stocks in
Japan produced the usual suspects-i.e., companies that were languishing under the thumb of a majority
owner parent company, or deeply indebted companies that were alive simply because their main banks
did not want to have to take write-downs on their loans. Investing in such deep-value stocks was a
waste of time, because webs of cross-holdings protected such firms from takeovers. That has now
changed. In 2003, there were 52 cases of takeover bids in Japan, for a total purchase price of
¥1.74 trillion. Such "value" transactions are beginning to change the market value of underutilized
assets in Japan.
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| January 26, 2003 |
Euro ReThink Will Help Japan?
The ECB and Euro countries appear to have reached the threshold
of pain at Euro 1.30 per US dollar. Look for more verbal intervention and machinations on the currency
front. Recent economic indicators show that Japan's economy at least took a breather in the final quarter
of calendar 2003. Moreover, the stock market has yet to breach October 2003 highs. If, by the end of
the first quarter (to March 2004) Japan's stock market has not righted itself, the only conclusion that
can be drawn is that the economic recovery was not the major turning point that was suggested by
the heavy trading volumes and capital gains in 2003.
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| January 19, 2003 |
Stock Market "Reads" Through Strong Yen
The market consensus about further weakness in the US dollar
has become so tight as to be a "mantra". When the consensus becomes this one-way, it makes ABW nervous, as
markets have a habit of making capricious turns just when everyone agrees on market direction. The big picture
is probably continued weakness in the US dollar for most of 2004, but that does not preclude a "dead cat bounce"
from an oversold position.
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| January 12, 2003 |
Japan's Recovery in 2004: Don't Blow It
2003 was a very good upside surprise–for Japan's stock market and
economy. With recovering equity markets and an economy on the mend, financial sector risk and balance
sheet risk has noticeably abated. Is it sustainable? That is precisely the question that investors
are trying to find an answer to. Investors will be very sensitive to any indications of market unfriendly
moves by both the BOJ and the government, before the recovery in both the economy and equity market
has a chance to grow roots.
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| December 22, 2003 |
Onward and Upward? in 2004
The yen could appreciate beyond JPY100 per US$ in 2004, causing
short-term consternation among policy makers and corporations. Historically, however, the yen has not stayed
very long once it spikes that far, meaning that Japan's export blue chips would first see a noticeable sell-off
as the yen breaks through the milestone. We believe however that investors should be buying into any
such sell-off, precisely because the yen would not stay at those levels for very long.
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| December 15, 2003 |
Secular or Cyclical Recovery? The Market Will Tell in Q1'04
Domestic investors, having been burned by previous
promising, but in the end brief recoveries, can be excused for being skeptical regarding the current
economic recovery. Since the stock market is a leading indicator of economic trends by up to six months,
the market's action in Q1'04 will be the first confirmation that this recovery is for real or not.
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| December 08, 2003 |
SRI Pays: Do Japanese Companies Get It?
SRI, or socially responsible investing, continues to
gain momentum among global investors, and is rapidly gaining awareness in Japan, as is its corporate
equivalent, corporate social responsibility (CSR). Japanese companies were at the forefront of
environmental awareness and reporting, but they now need to expand their concept to include other
social issues as well as corporate governance. With some JPY200 trillion in managed funds now using
some form of SRI screening, Japanese companies cannot afford to ignore this new trend.
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| Novemeber 24, 2003 |
79 Yen per Dollar: BOJ or No BOJ
ABW sees no reason to change its view
that the yen will continue to challenge the JPY100/US$ milestone, and could eventually attempt
to renew its prior high of JPY79/US$. Roughly speaking a JPY10 appreciation against the US dollar
reduces Japan's GDP growth by 0.5 percentage points, and thus a JPY20 appreciation (i.e., if the
yen appreciates into the '80s) would reduce Japan's GDP growth by some 1%. Japanese think tanks
are already projecting a peaking in Japan's economic recovery in FY2004.
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| Novemeber 17, 2003 |
The Bloom is Off the Boom
The once-soaring bank stocks have sold off 26%,
Softbank has crashed nearly 45%. Individual investors that were "peddle-to-the-metal" trading the
latest hot story have had margin calls. It looks like the bloom is off the mini stock market boom
in Tokyo, and an interim correction appears to be developing. Q3 GDP growth was much more subdued
than the surprisingly strong Q2 number, with personal consumption, which accounts for over half
of GDP, trending flat with the previous quarter. In other words, Japan's market is not looking
so relatively attractive now that everyone has rushed to correct an underweight exposure.
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| Novemeber 10, 2003 |
Post Monetary Policy Shift Scenarios
The good news on job growth in the
US is further evidence that the US recovery is deepening. In Japan, while third quarter GDP
is expected to experience a noticeable slowing, there has been a substantial recovery in
business confidence, and evidence that consumer confidence should also up tick in the final
months of calendar 2003. Ironically, the biggest threat to the rally in Japanese stocks may
be relative underperformance to its global peers, as foreigner investors have been calling
the shots all year, and active individual investors have been taking their ques from
foreign investors.
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| Novemeber 3, 2003 |
Tech is Back, Sort Of
US investment in information processing equipment and
software has shown a "V-Shaped" rebound, from -15% YoY in Q4 2001 to 8.7% YoY in Q3 2003. In addition,
growth has accelerated since turning positive in Q3 2002.
But the interim results of Japan's electronic majors showed a wide divergence in the degree of recovery.
Toshiba and Fujitsu were still recording net losses of over JPY32 and JPY58 billion respectively, while
Matsushita and Sharp reported healthy net profits of over JPY23 and JPY27 billion respectively.
The rising tide that at first lifted all Japanese tech boats did not last. Going forward, ABW expects
investors to become more selective, rewarding those Japanese tech companies who can deliver real
earnings improvement, while abandoning those who cannot.
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| October 27, 2003 |
Caution: Slippery When Excessively Liquid
Now, it seems investors are
increasingly nervous about the next shift in monetary policy, as central banks
react to inflation, not deflation. The recent three-day sell-off in Japan hit the financials the hardest, and may be a hint of what to
expect should a full-fledged consolidation develop. As the driver of stock prices shifts from
excess liquidity to earnings, markets inevitably consolidate. The only sector that held up was
the pharmaceuticals, which have been sitting on the sidelines so far in this rally. If the
consolidation lingers, one might want to buy some pharmaceuticals as "insurance". There is
little relative downside risk in the sector from here.
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| October 20, 2003 |
Gold vs Equities. Which is the Real Bull Market?
Until recently, everyone was fretting about deflation.
Now they have lurched toward inflation, as the Reuters CRB index has staged a major breakout from the
long-standing bear market in commodities. Past rallies in the CRB index have brought with it rallies
in Japan's oil/coal, nonferrous metals and other commodity pricing-dependent sectors–and is again.
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| October 13, 2003 |
What is the BOJ Up To?
The BOJ's surprise move appears to be
a change of tact, aimed at several monetary policy goals. But under a ZIRP (zero interest rate
policy) regime, the monetary base and short-term government bills are almost complete substitutes.
This means that; a) "unsterilized" currency market intervention has essentially the same impact as
"sterilized" intervention on the exchange rate, and b) that the soaring current account balances have per se have no economic effect, as
they play no part in the creation of credit.
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| October 6, 2003 |
Good Economic News Averts Extended Correction
The US jobs report came at just the right time-perhaps
representing an inflection point in investor perceptions and preventing an extended consolidation in
US stocks. But the increasing US dependence on foreign capital to fund twin deficits will continue
to haunt the dollar, despite increased confidence in the economy. And while the BOJ continues to
pour trillions of yen into the currency markets to keep the yen from challenging the JPY100/US$
milestone, they appear to be fighting a losing battle. This means there is continued currency
risk for Japan's exporters, who were budgeting an average JPY115/US$. During the recent correction,
this worry hit the Topix Core 30 stocks the hardest. Conversely, the JASDAQ continues to print new
highs. And ABW believes the small caps will continue to outperform.
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| September 29, 2003 |
Demise of the Strong Dollar Policy?
The US and Japan stock markets don't like the "smell"
of a possible demise in the US's "strong dollar policy". Historically, a weak US dollar and a strong
Japanese yen have actually been good for stocks in both markets. But if the BOJ's massive interventions
fail, the yen is going a lot higher, well beyond JPY100/US$, and perhaps challenging the prior high
of JPY79/US$. A two-digit appreciation in the yen and a corresponding decline in the dollar would
rattle both stock markets.
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| September 22, 2003 |
Cyclical vs Secular? Not a Problem Until 2004
The debate about whether the current economy rebound
is cyclical or secular really makes no difference to the stock market in 2003--either scenario produces
good gains for 2003. However, for the market to continue rising in 2004, there needs to be an expansion
of credit, something that the banking sector is currently incapable of providing, and which ostensibly
has to be supplied by the BOJ through unconventional means. While the real estate sector was at the
heart of the 1980s bubble, real estate stocks have recently been among Tokyo's best performers. Not
because the top-down picture is bright, but because Japanese real estate companies have come to
realize the advantages of using "OPC"--other people's capital (including foreign capital).
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| September 15, 2003 |
A Little Good News vs Overly Bearish Expectations
The top-down news in
terms of revenues is still bad. Nationwide department store sales declined for the
16th consecutive month, while the seven majors are expected to report yet another year of
down revenues in FY2003. If this is the case, why are some of these stocks soaring? It
appears to be simple case of an overly bearish consensus and just a little good news-in
other words, a micro-level version of the factors driving the current rally in Japanese
equities as a whole.
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| September 9, 2003 |
Are Corporate Revitalization Plays a Short?
The financial markets began to discount a
"hard landing" for Japan's banking sector, and accelerating deflation. That has now reversed.
Moreover, great hopes on being placed on the ability of the IRCJ and other corporate revitalization
efforts. However, can or should these efforts save all of the corporate zombies whose stock
prices have been soaring of late?
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| September 1, 2003 |
Japan's New Seniors Drive Consumption
The bad news is that the IMF estimates that Japan's GDP will fall
by a cumulative 20% over the next century, the good news is that projections have seniors spending
nearly JPY11 trillion a year. But marketers need to recognize that there are three separate sub-groups:
"Hyper Seniors", "seniors" (mid 50s-late 60s), and "the elderly" (those over 75). Hyper seniors
lead active lifestyles, are active consumers, and have a high capacity for absorbing information.
Any consumer company that ignores this market segment in Japan will find that their target market
is actually shrinking, and will have increasing difficulty maintaining sales growth in a rapidly
aging market place.
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| August 25, 2003 |
Japan's China Card
Investors that are doubtful of
a budding economic recovery point to the fact that the recovery is almost entirely US
driven. In reality, exports to the US are actually down so far this year.
It is actually exports to Asia that account for the bulk Japan's exports, particularly China. Moreover, an increasing
amount of these exports are being consummed in the region, not merely being re-exported to the Anglo
Saxon nations. Asia exports are now 45.1% of Japan's total exports, with 11.6% coming from China.
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| August 18, 2003 |
Japan's REITs: 5% Yields?...In Japan!?
Japan's budding REIT market, launched with much fanfare in September
2001, has languished, but recent changes in; a) the investment environment for domestic institutions
desperately searching for better yields, b)changes in the treatment of REIT dividends in FY2003,
and c) relaxed restrictions on investment trust holdings of both domestic and foreign REITs are
positive factors that could ignite growth of the secondary market for REITs in Japan. Besides,
they yield 5%, in zero interest rate Japan.
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| August 11, 2003 |
Election Scenarios and the Banks
The merger of the DPJ and the Liberal Party has led to speculation
that Japan's next elections will be basically a two-party affair. Correspondingly, this leads to three
possible scenarios as to how government policy will affect the banks. The first (and most likely in
ABW's view) is that voters give the Koizumi Administration a "go" sign for their reform mandate.
The second (and less likely) scenario is that the new merger produces a further shift away from
the LDP, which could actually be the most bearish for the banks. The third is that Koizumi is
usurped from within his own party (the LDP). Short-term, this may help the banks, but in the
end is most negative for the market.
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| August 4, 2003 |
JASDAQ: Less of a Winner Than You THink
On the surface, the JASDAQ (and its J-Stocks "nifty" group)
has led Japan's stock market rally. In reality, however, just four stocks produced the bulk of the JASDAQ returns, with just
one stock accounting for nearly 50% of those returns. Yes, with Yahoo Japan, the JASDAQ hit a home run. However,
Yahoo Japan is now moving to the TSE 1 market, and leaving the JASDAQ searcing for its next superstar to drive
superior performance of the JASDAQ and its J-Stocks index. Without the four big winners (and Yahoo Japan in particular)
the so-called stellar performance of the JASDAQ versus the Topix evaporates into mediocre performance that didn't
even match the performance of the price (not market cap-weighted) Nikkei 225's rebound.
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| July 28, 2003 |
The Dogs of the Nikkei
This Japan rally is unusual in that individual "punters" in
many respects have led the charge, trading mainly "penny" stocks once priced for bankruptcy.
This got ABW thinking about the "Dogs of the Dow" and whether or not the "Dogs of the Nikkei"
are as consistent. Turns out that the Dogs of the Nikkei has worked the majority of the time
over the past 10 years as well, even amid the "Hesei" bear market. These "dogs" are in many
respects what Japanese equity strategists have been recently referring to as "domestic demand
driven stocks"--the antithesis of the traditional foreign investor favorites.
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| July 21, 2003 |
Do You Believe? Or Are You Just Greedy?
At the beginning of March, investors were fearful of just about
everything and the US was going to another war in the Gulf. Then, ABW was pretty confident that
history was on the market's side-i.e., that the stock markets would rally as "blood was running
in the streets". History was on the market's side. But the dramatic turnaround in investor
sentiment is now sending up warning flags. Investor sentiment is rising even fast than stock
prices. A few months ago, it was "Japan passing". Now, there are suggestions that this is the
beginning of the end of deflation and the Heisei Malaise. But the very same factors that now
make Japan an attractive relative play are hostage to the expectations of a US economic recovery.
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| Bottom-Up versus Top-Down |
(Asian Business Watch 07.07.03)
While the Nikkei rally is the best since early 2002, there have been
six bear market rallies in the Heisei Bear market, two where stocks rallied more than 50%. Thus domestic
investors can be forgiven for being skeptical that the current rally is anything more than a respite
from an ongoing secular bear market. There are however two indicators that bear close watching. One
is the historically high level of trading volumes. The other is the steadily improving trend in free
operating cash flows, which have been moving in opposite direction to the Topix and have been
consistently positive since the April-June quarter of 1997.
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| Comply or Explain: Japan's Shareholders Speak Out |
(Asian Business Watch 06.30.03)
Domestic investors, particularly public pension funds, are beginning to aggressively
vote their shares and confront management. This represents a potential turning point in Japanese
corporate governance. Yes, "good" corporate governance pays, but "good" needs to be measured
in qualitative, not quantitative terms. The temptation is to grab a number, such as the number of
outside directors, to use as a yardstick for the quality of corporate governance, but this misses the
point. |
| It's Just a JGB Hiccup |
(Asian Business Watch 06.23.03)
Lest we be misunderstood, ABW like
others believes that Japan's JGB market is a major bubble that will eventually burst. However is
this bubble is not ready to burst just yet, and if it does, it will be over the dead bodies of
the Koizumi administration, the BOJ and even the LDP. The Japanese government is simply not
prepared to pursue a serious reflation effort, nor to deal with the potential crisis-like
complications that a serious reflation effort would have on the JGB market. For one, some 70% of
the capital of Japan's major banks are those infamous deferred tax assets. |
| A Welcome, Albeit Short-Term, Rally |
(Asian Business Watch 06.16.03)
The big money managers in Japan (pension funds) already made up
their mind about 2003 when they compiled their planned asset allocations at the beginning of the
year. The conclusion was to reduce exposure to both domestic equities (and, albeit with less
conviction) foreign equities, and to become even more risk-adverse. Yes, the long-awaited
crash in the JGB market could still come at any time. But if it does, it won't be a simple
exercise of investors shifting funds out of JGBs into the equity market, because whatever
makes the bond market crash will certainly not be good economic news, nor good news for
Japanese equities. |
| 21st Century Deflation |
(Asian Business Watch 06.09.03)
Contrary to what has been suggested
repeatedly and as recently as January 2003, Japan's JGB market continues to make history as
yields continue sliding to 0%-and maybe even further. There will be no major reversal in bond
prices until investors are convinced that Japan'sgovernment is totally committed to eradicating
deflation. If post-Great Depression interventionist policies do really work against deflation,
the cure for Japan's deflation could well be "overwhelming use of force" to convince market
participants that the end of deflation and the beginning of inflation is just a matter of time.
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| Go Small Cap, Young Man |
(Asian Business Watch 05.29.03)
For Japan, one can only hope that the
entrepreneurial "animal spirits" of the smaller cap companies and risk-taking foreign capital
eventually lead to Japan's revival, just as the resurgence of entrepreneurial activity in the
late 1980s and early 1990s was the engine of the US IT "miracle" and the "new" economy. There
may even be Japan's next national champion somewhere in JASDAQ's growing ranks.
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| The Bailout of Resona Holdings |
(Asian Business Watch 05.19.03)
The bail-out of Resona Holdings is
indication that the battle for reform has not been completely lost, nor has Mr. Takenaka and
the bank "hawks" completely been stonewalled by the banks and their LDP supporters. This time,
it was the auditors who blew the whistle on the "smoke and mirrors" of deferred tax assets
currently being counted as a significant part of regulatory capital. But it is also yet
another confirmation that the balance sheets of Japan's major banks remain severely
undercapitalized in real terms.
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| Then There is the Population Crunch |
(Asian Business Watch 05.13.03)
Somewhere around 2006, Japan's
population will peak and begin to decline. By the year 2050, according to the latest Japanese
government estimates, one third of the population will be above retirement age, and the
overall population will have dropped by 27-million people. The social and economic
implications are enormous. The negative effects of Japan's population crunch are already
beginning to emerge. Moreover, population pressures will continue to sap
economic activity even if Japan shakes off its deep banking crisis and the crippling bout of
price deflation.
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| The Death of Actively Managed Funds |
(Asian Business Watch 05.05.03)
Because of a quirky change in pension fund rules by the government, and
given horrible returns that continue to generate under-funded pension obligations, Japanese companies
are rushing to return that portion of their corporate pension funds managed on behalf of the government's
Welfare Pension fund. To do so, however, they effectively have to liquidate the portfolios and return
the funds as cash, thanks again to the quirky rules implemented by the Welfare Ministry. Ironically, this
is happening as the ruling party is bemoaning the fall-off in stock prices.
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| Severe Acute Reform Repulsion Syndrome (SARRs) |
(Asian Business Watch 04.28.03)
Japan has so far escaped the ravages of SARS (severe acute respiratory
syndrome), but continues to suffer from SARRS (severe acute reform repulsion syndrome) that will be much
harder to cure than SARS, as it involves no less than dismantling the current policy making "system" in
Japan and rebuilding a new one-a task that even "Koizumi the lion-heart" is finding to be unassailable,
as will his successor-particularly if he (or she) is also chosen from among the ranks of the LDP.
Everyone (politicians, the business lobbies, the major banks, the bureaucrats and the voting public)
will generally agree that Japan is in need of serious reforms. But when it comes to actually
implementing reforms, there are 60,000 excuses why they cannot be implemented.
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| Japan's Polarizing Markets |
(Asian Business Watch 04.21.03)
While polarization within Japan's economy and financial markets is
becoming increasingly obvious, is this phenomenon evidence of "creative destruction", or are these
instances merely sidebars to the main scenario? Rather than evidence of a major, new wave of creative
destruction, ABW believes the instances of positive change pointed to by "optimists" to be basically
sidebars to the main scenario, which is one of continued economic deterioration and capital destruction.
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| Whither Reforms Post Koizumi? |
(Asian Business Watch 04.14.03)
Mr. Koizumi's best hope for a
recovery in popularity and a better-than-even chance of surviving past September is the
Industrial Revival Corporation (IRC) and the new Bank of Japan governor. But it has been
ABW's contention from the onset that the IRC was being set up to fail, Japan's voting public
still is desperately searching for a hero, but increasingly
suspecting that Mr. Koizumi is not their man.
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| Baghdad in 17 Days |
(Asian Business Watch 04.07.03)
The most accurate measures of how the Iraq war is affecting markets is the oil and gold
markets. Both are acting like the result was already a foregone conclusion some time ago, irregardless of what the popular press was
saying. Japan's equity market is more complicated, but we neverthess see potential for a tradeable rally in the April-June quarter,
that will be part relief rally, part supply-demand improvement, and part policy backsliding to remove pressure on the banks.
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| "Extraordinary Measures" Mode |
(Asian Business Watch 03.31.03)
The Japanese government has shifted into an "extraordinary measures"
mode, spooked by the prospect of negative fall-out from the Iraq War, at a time when concern about yet
another financial "March crisis" was at its peak. This unfortunately has produced more "band-aid"
measures that will do nothing to solve Japan's structural problems, and may be even more harmful
over the medium-term.
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| Long One or Short One, It's Good for Stocks |
(Asian Business Watch 03.24.03)
Regardless of if it is a short one or a long one,
history has shown that the onset of war usually represents a "buy" signal for stock markets. The Japanese
stock market will take its cue from the US, but the first requirement for a trade-able rally in Japan is reduced selling
on the bank stocks. Moreover, as the rally will be muted, it is better to play is to hold a high beta stock
that has larger market capitalization and has good market liquidity. Nomura Securities seems to fit these criteria.
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| Crocodile Tears |
(Asian Business Watch 03.17.03)
As predicted in last week's ABW Market Letter,
the Japanese government has belatedly responded to the fall in the Nikkei 225. While there is an
outside possibility that "this could be the big one" in terms of a real crisis, ABW suspects that
all this sudden concern about the stock market after months of neglect by old-line LDP politicians
is merely crocodile tears for their large corporate contributors and the voting public who will
go to the polls in April--plus of course the chance for the old LDP guard to upset Mr. Takenaka's
"hardline reforms" teapot.
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| "Rights of Spring? |
(Asian Business Watch 03.10.03)
Here it is March again and the Japanese stock market is again
being pushed to new lows,Which has traditionally elicited enough LDP alarm and cries of anguish
from financial institutions and corporations to prod the Japanese government into the "rights of
Spring"-i.e., the ruling party law makers circle the wagons, and flood the media and financial
markets with new stimulus trial balloons to see just what it will take to get a pulse from a
moribund stock market.
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| New BOJ Governor: Gradualism, Not "Eccentrism" |
(Asian Business Watch 03.03.03)
The appointment of a new BOJ governor
has not changed the fact that no one has a credible program to fix Japan's deflation. The BOJ can
only agitate and provide "moral suasion" for such reforms, while keeping the markets flush with
cash to prevent a financial system "accident", and to shoot for price stability. (forget about
inflation targeting. Just achieving zero inflation, a goal already embraced by the BOJ, will be
difficult enough). In this regard, the common thread of the new BOJ governor and deputy governors
is reform. Deflation cannot be cured through monetary easing alone, and that makes structural
reforms more important than ever.
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| M&A: No Silver Bullet |
(Asian Business Watch 02.24.03)
From a macro perspective, there is no denying the crying
need for more dramatic consolidation in Japan, ostensibly through M&A. But ABW believes M&A is not the silver bullet for what ails Japan.
Simply, the problem is too large, and there may be no way out of the dilemma other than massive taxpayer funds, nationalizations, higher
interest rates, and eventually a lower yen.
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| Reluctant Entrepreneurs |
(Asian Business Watch 02.17.03)
Developing new businesses to create demand is becoming an important
issue in finding ways for Japan to work its way out of a decade-long malaise. However, Japan is now seeing a decline in R&D
and innovation that, along with other problems, is seriously inhibiting its ability to incubate innovative firms and to
create a much-needed cushion to absorb an accelerating loss of "old Japan" jobs. The growing ranks of jobless may find themselves
"reluctant entrepreneurs" in trying to create the jobs that Japan's government and struggling ex-national corporate champions.
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| Last Resort for Buyers of Last Resort? |
(Asian Business Watch 02.10.03)
The asset allocation of Japan's public pension funds
has come under renewed scrutiny, because they continue to rack up investment losses. To cope, these funds are becoming
much more activist vis-a-vis their Japanese holdings, while at the same time are allocating funds to overseas investments
in record amounts. The government and poorly managed Japanese companies are making a serious mistake if they
believe they can continue to count on Japan's traditional "buyers of last resort" to save them from much-needed reforms.
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| February 3, 2003 |
Buzzwords versus Shareholder Activism
While the top-down policy debate rages on about how to fix Japan,
another debate rages at the micro level about corproate governance. Growing signs of investor activism
show the most promise of forcing significant change from the bottom-up, and of ending the laissez faire
era of corporate governance in Japan. The continued resistance by large Japanese companies to more
stringent corporate governance does not square with increasingly clear evidence that good corporate
governance pays, and that investors are actually willing to pay a premium for good corporate governance.
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| January 27, 2003 |
Japan: Wimping on Reflation
The Koizumi Administration is long on words and short on action
regarding reflation. In fact, the CEFP has just pushed out the target to eradicate deflation to beyond 2005, and is now
assuming a longer "intense adjustement period" of low economic growth due to NPL disposal and other reforms.
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| January 7, 2003 |
JGBs in 2003: Die Another Day?
Given the rising possibility
of a fiscal crisis as well as a financial crisis, market players have been saying
for years that Japan's JGB bull market is a train wreck waiting to happen. Moreover,
talk of picking a new "deflation fighting" BOJ governor is making bond investors
nervous. Yet ABW suspects the worst we will see in 2003 will be a nasty but short-lived
sell-off in a secular bull market. In other words, JGBs will "die another day", not in 2003.
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