Japan’s Slung Arrow Aroma
Japanese investment trusts with over $40 billion in assets continued their EM bond outflow streak offsetting US and European inflows as domestic equities were first half global laggards awaiting additional “arrows” beyond massive monetary easing in the Abenomics quiver. Uridashi issuance in their currencies has been decent with half of the $15 billion annual pace in the Brazilian, Mexican and Turkish units as the Russian ruble and South African rand were dissed. Samurai bond action has turned mainly to multinational companies diversifying into yen, with Australian offerings popular after a bilateral economic partnership pact was signed lifting curbs in civilian and military trade. The consumption tax preliminary rise from 5 percent to 8 percent could shrink output 5 percent in Q2 as both domestic demand and exports suffer as business’ unspent cash pile exceeds half a trillion dollars. Auto companies are contemplating Thailand relocation with indefinite military rule and bank local lending has been flat despite central bank special facilities and tentative real estate rebound after decades of decline. Inflation has picked up to over 1 percent but long-term government bond yields have not budged as monetary stimulus pauses. The focus now is on enacting other elements of the reform package unveiled a year ago including company income tax reduction, more stock and risk-taking leeway in the giant $1 trillion pension fund’s allocation guidelines, and agriculture and labor market opening. Corporate governance change is also a thrust after a series of scandals at firms with large cross-shareholdings and foreign ownership, with enactment of a new Stewardship Code. The Transpacific Partnership negotiations with the US and other Asian and Latin American parties are still active official insist despite the trade impasse evident during President Obama’s recent visit. Diplomatic and military initiatives have sidetracked commercial momentum, critics argue as the Prime Minister pursues the other pillars of his campaign platform to revise the wartime constitution and assume a higher regional leadership profile. With China and Korea in mind, the self-defense force capability will be expanded and overtures to Taiwan and Pyongyang are likely and in domestic political terms may have cost the ruling LDP in by-election losses, particularly among young voters concentrated on the employment and training agenda.
Korean shares were barely ahead through July as the won continues to surge toward the 1000/dollar handle despite stepped up official intervention cited in the US Treasury’s latest manipulation report. Bellwether Samsung revealed poor earnings as investors called for further conglomerate spinoffs and management overhaul to realize value. The GDP growth forecast is now below 4 percent with the central bank on hold with inflation at 2 percent. Newly appointed Finance Ministry officials are preparing targeted industry and consumer incentives to boost competitiveness and activity after an initial round introduced by the President to redeem campaign promises expired. Shipbuilding has been positive despite naval confrontations with the North hurling insults and projectiles.
