Japan stocks lag while US/Japan summit ushers in the new cold war
Japan stocks lag others in April as its policy makers stumble again
Japan’s stock market has lagged behind other developed equity markets this month, giving up its last quarter’s lead, especially relative to US stocks which continue to rally higher. We think this is consistent with cyclicals having been consolidating ever since treasury yields peaked late last month and with it, the Y$ rate. With growth stocks rebounding in the past few weeks in line with lower long-term rates, it is not surprising to see our market which remains highly cyclical to lag others.
However, even German stocks which tend to be equally economic sensitive have outperformed those in Japan lately. With Covid vaccination programs continuing to advance in the US and finally revving up in the EU states, Japan’s slow response and poor planning to inoculate its nation has yet again not failed to disappoint, especially after having fallen short in terms of testing and tracking ever since the pandemic began. In fact, it is fair to assume that had it not been for the Japanese social norms and the country’s high level of hygiene, the Covid contagion would have been far more devastating given its ageing population.
Nevertheless, with global vaccination rates improving at a rapid pace despite some safety setbacks for Astra Zeneca and J&J jabs while economic recovery in US and China is starting to pick up notable pace, we continue to believe Japan’s highly cyclical stock market look well placed for a big breakout above the March highs. We believe this outlook will prove well supported by the coming earnings season when most firms will likely be posting much stronger earnings projections for this new fiscal year.
US/Japan summit ushering in the new cold war with China
As expected, the meeting between Prime Minister Suga and President Biden clearly reaffirmed their strong alliance in countering China on many fronts with the language of their joint statement proving fairly hawkish. Most importantly, Taiwan was notably mentioned as an independent nation for the first time in nearly 50 years. With the island nation becoming strategically vital to the West as a country which hosts much of the cutting-edge semiconductor manufacturing capacity that the world currently relies on, there is far more at stake there than just ideological differences with China and issues with alleged human rights abuses.
Although Japan clearly seemed to have managed to temper down the joint statement by emphasising on keeping an open dialogue, the reference to Taiwan and the importance of maintaining peace in the strait marks what could be the beginning of a new cold war with technology at the centre stage of this growing division. We suspect there is a strong possibility now that Japan will introduce more stricter export restrictions to China, most likely in areas of semiconductor materials and manufacturing equipment. Should China retaliate, this could not only lead to a major reconfiguration of the global supply chain, but a potential for Chinese consumer boycotts of Japanese brands could be yet another major development to keep a close eye on.
