Japan’s stock market unlikely to be supported by coming corporate earnings season

We have little doubt that credit contraction we are seeing, since start of the banking crisis is leading to slower US economic activity. As far as corporate earnings are concerned, the consensus for a second half recovery is increasingly looking too hopeful. However, with full auto production recovery at hand, at least in our own market in Japan, many firms will benefit this year from this rising output that should go beyond the auto sector itself.

However, we suspect the US macro picture is deteriorating rapidly and any sustained period of credit contraction from financial stress that are still reverberating could prove painful. With money market AUMs still edging higher while bank deposits remain under pressure as SVB is deemed a wake-up call to corporate financial managers, we can’t see credit conditions improving anytime soon, even if the banking sector avoids another big mishap.

As we have argued, we think Japan’s banking system looks fairly robust at this stage, mainly because there is no major duration risk given that BOJ owns close to 60% of all JGBs outstanding, and much bigger portion of the 10yr benchmark. In effect, much of duration risk has been nationalised and a big portion of the yield to maturity losses are now being assumed by Japan’s central bank.

Perhaps the policies of the outgoing governor, Mr Kuroda wasn’t so bad for Japan’s banks after all! Having been a longtime critic, we wanted to pay homage to a governor who above all, was courageous. It was a bold monetary experiment that had the political backing of the establishment, to try to jolt Japan out of its deflationary mindset.

His departing words were that YCC could be dismantled but ultra-loose monetary policy and QE maintained. He was perhaps hinting that the incoming BOJ governor, Ueda-san is likely to at least widen the band, if not, dismantle it altogether.

We believe that YCC will be ditched soon enough, taking advantage of weakening economic conditions that should weigh on yields from spiking too far. Moreover, it looks like Japan’s institutional investors will be jumping at a chance of locking into higher yielding domestic bonds.

So any major spike in rates following YCC’s abandonment will likely prove short-lived as global yields look to be heading lower. Nevertheless, with Japan bond yields still likely to rise in the nearterm, and US rates looking under downward pressure with disinflation taking hold, we think yen’s outlook remains very positive.

As we have also argued, this will bring with it, strong earnings headwinds for Japan’s multinationals and exporters, especially as end-demand looks to remain weak for the rest of the year. Japan is as always, a highly cyclical stock market by nature and the current earnings forecasts look too optimistic to see much support from the coming earnings season which is looking to bring with it big guidance risks for 3/24 projections. Auto output recovery is one caveat that should float many boats while Japan’s ongoing inbound tourism boom is another area that provides some shelter.