The Week In Hindsight 14 February 2014
The NIKKEI came in final place against other developed market indices this week as consumer confidence dipped while the nation itself posted its largest current account deficit ever. The spread between the value of imports and exports widened to 0.2 trillion yen for the month of January, driven by record levels of imports while exports on the month were seen as suppressed due to the recovery in the yen.
Despite the drop in stocks Japanese policy makers remain satisfied with the outlook for the economy. Robust performances from CPI indexes have helped to boost confidence in the government’s ability to end deflation while the sales tax increase due in April is likely to lead to yet more stimulus in the summer. This would be positive for stocks and should ensure that the correction in the NIKKEI bottoms at the 13,000 level.
For investors in Japan the road ahead is likely to get rougher as the outlook surrounding the impact of April’s sales tax is uncertain however, there is a supporting case for staying invested in the nation. This is as any indications of trouble being in store for the economy are likely to be met by further volleys of money printing and bond buying which would supportive of higher levels for stocks alone.
In addition to this, many commentators have a tendency to forget the $16 trillion of household financial assets which are currently asleep in Japan. It is estimated that 50% of this amount currently takes the form of cash deposits. Should incentives to hold cash reduce further at a time when JGB (Japanese Government Bond) yields continue to compress, capital flows toward equities could increase dramatically. Given the sheer scale of cash piles on household balance sheets, the transference of even a small portion of this into equities has the potential to have a significant impact upon Japanese stock markets.
For these reasons we continue to believe that the stars are aligned for Japanese stockholders.