Investors ignore rising US inflation while Japan investors brace for Olympics

Cooling off in sales of large ticket items brings its own problems
With rising inflationary pressures in the US failing to cool market’s enthusiasm for risk, the prevailing wisdom that these pressures remain mainly transitory has left markets surprisingly comfortable with high inflationary readings. Some are waiting to see if there is any change in the language of the Federal Reserve meeting on Wednesday that might indicate that its internal tapering debate has begun. 

How much of these price increases are due to temporary re-opening bottlenecks and how much is becoming embedded is currently subject of great debate among economists. Inflation doves have been pointing out that recent cooling off in demand for higher ticket items such as housing and cars suggest that consumers are starting to react negatively to price increases, supporting their idea that inflation rates will ease off from current highs in the medium term.

Even if this is so, it might also suggest weaker consumer trends ahead and if price increases are not flowing downstream as easily as they have been, a squeeze in corporate profit margins seems logical as rising input costs are still on the offing. Worth adding that shortages in parts and components are already affecting output in many sectors, namely in tech which also faces the prospects of a notable inventory adjustments as double-ordering have in our view greatly distorted the end-demand picture. 

Potential for super-spreader event might leave Japan stocks treading cautiously
Zooming back to our own market in Japan, we think stocks look likely to be range bound for the next month or so with Topix which has bounced nicely from its May lows now nearing resistance levels which current low volumes indicate it is unlikely to break through. With Olympics fast approaching and the government’s stance in going ahead with the games looking unflinching, the potential for a super-spreader event is now a credible threat (but a ‘known known’) that could keep investors side-lined for now.

We were hoping that the government would yield to logic, write off the sunk cost of the event and heed the calls of its top medical experts by calling the games off (or at least, delay them). We think that would have triggered a big rally in Japanese stocks, as it would have removed one major short-term uncertainty. However, it should also be noted that one positive aspect of the Olympics (the only one we can think of) has been that its looming start date in late July has forced Japan’s sleepy policy makers into action in speeding up the country’s vaccination programs.

Indeed, investors should note that even after a likely Olympics-related surge in infections, with vaccines clearly working in rapidly reducing infection rates and hospitalisations in most developed nations, and the re-sequenced jabs that are better targeting Covid variants are on their way, we continue to believe that pandemic-related risks are behind us and we retain our bullish investment stance on Japan’s re-opening plays. Unless we see more resilient variants emerging that might reset expectations, we think any further selloffs related to Covid provides short-term buying opportunities.