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Is Japan's Rally For Real This Time?

12 July 2013 in Trading Ideas

And you thought the recent volatility in the US stock market was something.

Check out the recent path blazed by Japanese stocks: After opening the year with a 50% surge through the middle of May, the country’s Nikkei stock index tanked by more than 20% in just three weeks. But now, the bull is apparently back, and Japanese stocks have climbed 16% in the past four weeks.

Our QE Japan motif, by the way, has risen 6.6% in the past month. The S&P 500 is up 1.6% in that same timeframe. Since the motif’s inception in March 2013, it’s up 7.5%, and the S&P 500 has increased 8.8%.

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The Wall Street Journal recently reported that analysts were citing three main reasons for the recent recovery in Japan’s stock market: a stronger US dollar, greater faith in the US economic revival, and an increasing belief in the reflationary economic theme that the Japanese government has been trying to hammer home.1

The persistent strength of the US dollar has been a particularly strong headwind for an export-driven economy that has risen and, for the past two decades, mostly fallen by how well the country’s top companies can repatriate profits from dollars into yen.

As the New York Times reported, industrial production rose 2% in May from a month earlier.2

But as the Times also pointed out, a key anticipated benefit of the new easy-money policies by Japan’ prime minster, Shinzo Abe, and his like-minded colleagues at the Bank of Japan – Japanese citizens spending again – hasn’t yet come to pass. Indeed, household spending in Japan fell 1.6% in May, which badly missed economists’ consensus expectation that it would rise 1.3%.

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The silver lining was that, for the first time in seven months, core consumer prices didn’t fall, staying flat after falling 0.4% a month earlier.

Another hopeful sign, according to the Times, is that those with money seem to be stepping up to the cash register. Sales of Ferraris are up 20% already this year, while sales at the upscale Hankyu Umeda department store have jumped 63%, thanks to spending on items like luxury items and jewelry.

For now, Abe’s reinflation strategy has been propped up by a weaker yen. But economists say a longer-term recovery for Japan’s economy (and possibly, its stock market, too) depends on how much of this new corporate profit finds its way into the hands of consumers in the form of higher wages and better job opportunities.

If prices start re-inflating with no accompanying wage growth, the inclination of Japan’s middle and lower classes to inflate their spending habits may never come to pass.

1Bradford Frischkorn, “What Bear Market? Japan Stocks Are Surging Again After Fall,” WSJ.com, July 8, 2013.

2Hiroko Tabuchi, “Getting Japan to Spend,” NYTimes.com, June 28, 2013, http://www.nytimes.com/2013/06/29/business/global/japanese-consumers-start-to-buy-tentatively.html?pagewanted=all, (accessed July 10, 2013).

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