29 July 2018
Much of last week's excitement came from our market in Japan as speculation grew that BOJ could change the nuance in its policy wording, tolerating lower inflation rates and start the process of tapering by first allowing long term rates to head higher. Although most economists expect no change in BOJ's QE program on Tuesday's meeting, the market is clearly sensing that the central bank will have to end its easing at some stage soon given the rising pressures from financial institutions, pension funds and savers.
The possibility that Japan could also come under the microscope for currency manipulation by US policy makers is also raising the political stakes in BOJ's overtly loose monetary policy. With Japan planning to raise its consumption tax again in October next year, the central bank must know that the window to taper will be closing fairly soon and with labour costs and input prices on a notable rise, and price hikes starting to feed down the chain, we strongly believe surprises from Japan's CPI should be on the upside.
As we have previously underlined BOJ is already tapering as huge wave of JGB maturities have led to further declines in supply of long-dated paper and the general liquidity, making the bond market very volatile. We think BOJ will have little choice but to allow for longer dated bond yields to edge higher to help the financial institutions as we as Japan's savers. The most recent spike in the long term rates and the strengthening of the yen provided a useful reminder what could happen once BOJ, which in our view is already behind the curve in tapering, begins its monetary policy normalisation program.
It is interesting to see Japan market participants becoming increasingly concerned about BOJ's ETF purchases which has led to big indirect holdings in names like Fast Retailing (9983), Family Mart (8028), Terumo (4543) and Konami (9766). Given the likely limited impact of BOJ's ETF purchases on the real economy, and given the fact that ETFs do not mature like JGBs, we think there is also a possibility of BOJ lowering its purchasing targets here.
Last week we removed a number of semiconductor names from our short sell picks as the market seems to have digested much of the push-outs in SPE orders for now. LAM Research's prediction that orders will bottom out by September also encouraged US investors to pile back into equipment names by Friday, although weakness in Intel and Microsoft shares had confused the picture as the sector is being torn by winners and losers, underlined earlier by the results of Facebook and Alphabet.
In Japan, names like Shin-Etsu (4063), Nidec (6594) and Alps (6770) had also seen decent quarterly earnings while Nomura (8604) and its affiliate, JAFCO (8595) look to be notably struggling in this capital market environment. Following the US auto peers, Nissan (7201) was one of the first of Japan's auto makers to post weaker than expected earnings.