20 April 2019

Although Topix continued to move sideways last week, there were notable shifts in sector performers that painted a more positive picture for Japan's stock market as we enter the start of the earnings season this week. With defensive names like foods, utilities and pharmaceuticals coming under considerable selling pressure while cyclical plays, namely shares of techs and factory automation plays which we remain very positive on marching higher, it is becoming increasingly evident that domestic investors are finally turning more bullish about the prospects of stocks. 

Indeed, talks of yield hungry Japanese insurers rethinking their strategy of raising their treasury bond holdings in the face of increasingly dovish Fed and looking to buy more domestic stocks instead makes much sense given the developments thus far this year. Although the coming earnings season will undoubtedly prove to be poor, especially for cyclical segments of the market, should domestic investors also be getting involved, we think it is more likely than ever that the weaker earnings picture will once again be shrugged off as it was in January. 

Moreover, with the most recent trade talks between the US and Japan signalling a far more dovish approach by the Americans towards Japan, our scenario of a more contentious trade negotiations have not panned out like we had feared. It seems that the US policy makers do not want to stir up more uncertainties and are likely to allow Japan to abide by the same rules as it had been stipulated in the TPP agreement. 

Perhaps President Trump has adopted a more favourable view regarding Japan which has done much to appease him since his ascent to power. With the Japanese premier having even nominated him for the Nobel Peace Prize back in February, perhaps the US president is softening his stance regarding trade with the Japanese. 

With Abe-san having been invited to meet Trump this week in Washington, partly to celebrate the US first lady's birthday while Japan having inviting the US president and his wife late next month for a first official state visit soon after Japan's Crown Prince ascends to the Chrysanthemum throne, Japanese government look to be doing its best to keep relations warm and avoid a future trade spat which looks far more likely in the case of coming bilateral negotiations with the EU. 

With no mention of currency provisions being demanded by the Americans either, Japan could indeed walk away unscathed as we don't think Abe would have visited Washington so soon after the initial trade talks unless both sides were happy with the status quo. Certainly, the market has taken the signals that have emerged from last week's trade negotiations fairly positively with autos and auto parts which looked vulnerable ahead of last week's meetings being bought aggressively. 

Such a scenario could also remove the threat of a sudden jump in the Japanese currency which we had feared if the US took a more hawkish stance in the trade negotiations. Although the longer than usual public holidays coming up after Japan's Golden Week has led to some early squaring of positions, an absence of a call for a currency provision by US policy makers could be a major signal that the US will tolerate a weak yen and could provide yet more fuel for shares of Japan's cyclical exporters to rally further.