Important near-term issues from Japan stock market participants lens

Keeping track on number of key near-term developments 
Going deep into the current earnings season next week, overlapped by the all-important Cop26 environmental summit in Glasgow and Japan’s Lower House elections due this Sunday, there are plenty of important events to keep track of. Although we remain bullish on Japan and its broader market for the rest of the year, we also continue to see great near-term shorting opportunities in names where earnings expectations are high but chances for negative surprises have also escalated due to supply issues or for those exposed to dimming demand from positive distortions of the pandemic lockdowns. 

US inflation remains the key debate point as market is trying to determine how much of recent price increases are becoming embedded. Recent spikes in shorter end of US treasury yields seem to suggest that investors have moved on from tapering concerns and are pricing in potential for bigger rate hikes next year. Although, wage and rent inflation are generally more entrenched, we also think that most supply-side issues will be resolved as we pass the worst of the current bottlenecks. In fact, we suspect we could see a supply glut coming from the over-ordering, hoarding of equipment and front loading of capex budgets that we have seen in the past year, especially in China where demand is now slowing.

We’ve also been carefully following the geopolitics as US foreign policy protocols which laid the foundation of China’s entry into WTO are being rewritten. Its latest support for Taiwan being invited to the UN, confirmations of US armed forces being stationed there, and an astonishing declaration by Biden that US will protect Taiwan in case of an attack, are all worrying developments that suggest a cold war on the horizon. Indeed, we think hopes of US/China relationship entering calmer waters ahead of the online summit of their respective leaders seem misplaced as we see rising probability for a much broader export restrictions to China, particularly in technology segments which could prove damaging to earnings in 2022.

Although the outcome of this Sunday’s Japan Lower House elections are unknown at the time of producing this weekly note, there could be some surprises ahead worth preparing for. Indeed, if the ruling LDP doesn’t hold on to its big majority, it could be vulnerable to fracturing from potential revolt by the younger Turks which had backed Toro Kono in the party’s latest leadership race. With Japan’s new PM, Kishida-san showing very little divergence from Abenomics and talks of new type capitalism to better distribute wealth seem somewhat hollow at this early stage, we think LDP urgently needs more popular reformist leaders with newer ideas. We thus see any major loss of seats for the ruling party that could threaten Kishida’s position as Japan’s PM as a hugely positive development for Japan and its market.