Shinzo's 'Abenomics' Appears to be Losing its Sheen

Japan's markets will reopen Thursday.  The day after, Japan expects to report that core inflation fell back below zero for the first time since April The year 2013.  Abenomics has lost its sparkle with the economy contracting in four of the past seven groups.

In some ways, Abenomics was a typical LDP plan of fiscal and financial expansion but on steroids.  The reforms that are area of the third arrow have largely didn’t capture the imagination associated with investors though we see the corporate governance reforms as substantial.

S&P's recent downgrade associated with Japan to A+, matching the earlier move by Moody's, had been coupled with an ominous warning Abe will likely fail to reverse the deterioration over the next 2-3 years.  Debt-to-GDP is around 246% and the budget deficit throughout the current fiscal year is actually near 6.2%, more than two times the size of the US shortfall.

Abenomics has succeeded in boosting the actual profitability of Corporate Asia.  This is a function of the weaker yen and corporate tax slashes.  Yen weakness did not increase market share for Japanese exports however has translated into greater foreign earnings.  

August trade figures released last week showed that exports on the year-over-year basis were up 3.1%. However, this is a function of worth, not volumes.  Consider that Japoneses exports to the US are up 16% in value terms but are virtually flat by quantity.  The value of exports to the EU expires 5.1%, but less by volume.  Exports to China clarify the point.  By value, they’re up 1.6%, but down 4.4% by volume.  

In reality, many expect that over the next couple of months Japan may declare additional fiscal support by means of a supplemental budget.  Anticipations of additional monetary stimulus in the form of additional asset purchases are also running high, and will likely be boosted by a the re-emergence associated with deflationary pressures.  Many look for a BOJ announcement toward the end of next month.

If accurate, BOJ's Kuroda is not showing any kind of sign that he is moving in this particular direction.  In fact, the BOJ seems to be soft peddling its preferred measure of core inflation for a measure that excludes food and energy (and alcohol).  It stood at 0.6% in July and expects to have ticked up to 0.7% within August.

BOJ's ETF purchases and a weaker yen may have helped lift Japanese equities.  The diversification of Japoneses pension funds also pushed in the same direction.  While Abenomics may not be over, the diversity of Japanese pensions seems close to completion.  In the March to June period, Asia pensions sold domestic equities breaking a five-quarter buying exercise.  The large Government Pension Expense Fund appears to be within Three percentage points of its focus on weight for domestic bonds, stocks, and foreign property. 

The foreign appetite for Japanese stocks has waned.  In fact, this quarter through mid-September, international investors have more than cut in half the purchases of the past 12 months.  Foreigners have sold roughly $34.3 bln of Japanese equities since the beginning of July.  This leaves them net buyers of $31.0 bln over previous year.  The pace of liquidation offers accelerated.  The week through Sept 11, which is the most current information, saw foreign investors sell a record of a little more than $11 bln associated with Japanese stocks.   Through Sept 11, foreigners sold Japanese stocks consistently since mid-June, with only three exceptions in the 14-week extend. 

One issue that we suspect hasn’t yet gotten the attention this deserve involves Japanese banks.  Data from the Bank for International Settlements shows that Japoneses banks surpassed UK banking institutions are the leading cross-border lenders within Q1.  Their foreign claims from $3.53 trillion squeezed in front of British banks by a small $10 bln.  The Japanese lending has been focused in infrastructure projects and also to Asian countries. 

Reports suggest some of the banks' funds previously invested in JGBs diverted in order to foreign corporate loans.  Mizuho, for instance, which is Japan's second biggest lender, bought portfolios associated with corporate loans in The united states from UK banks, that are re-focusing on its domestic client base.

The challenge is that the weaker economies, currency mismatches, and other considerations tend to be souring loans, especially to rising Asia.  Lending to Asian countries reached $189 bln at the end of March.   Asia, ex-Japan accounted for 9.3% of the property of Japan's largest loan provider (Mitsubishi UFJ) at the end of March, the largest in at least a decade.  Overdue loans from the region rose 77% in the year through the end of 03 at Sumitomo, Japan's second biggest lender, and 24% at Mizuho.  Moody'utes has made 63 downgrades in the region, not including Japan and only 13 updates.  That seems to be a key dimensions of the challenge facing big Japanese banks.

Japan Economic Revise is republished with permission from Marc to Market