Japanese investors are not known for their pioneering spirit in the world of stock-market investment. So it is interesting to note from discussions with fund managers in Tokyo this week that they began in the second quarter to put money back into Asian ex-Japan markets.
Still, if the Japanese are returning, albeit in a cautious manner, the recent runs in Asian markets are driven mainly by the local retail investors. Korea is the best example. Foreigners were net sellers of 732 billion won of equity in June, but the Korean market still rose thanks to growing retail buying. This may be one sign of a rally that will soon require pause for breath.
Another may be increased focus on the supply of equities coming through. Rights issues have been bullish in Asia during the first half, benefiting Greed & Fear's deleveraging theme. But at some point, rights issues and other capital-raising activities will resume their normal role of being negative for share prices. We are probably getting near that point as investment bankers' deal pipelines fill up.
Thai Farmers Bank's
recent disclosure that it will raise 24 billion baht worth of new shares through a rights issue. Asia is in a bull market, but we are close to a significant resistance level on the benchmark
MSCI Far East Free ex-Japan
index. This is defined as between 320 and 340 on that index, or only 7% and 14% above where the index closed the second quarter. Subsequent moves in July have put the index at 311, even closer to the resistance level.
Greed & Fear will therefore begin to raise cash in the asset allocation if and when the regional stock markets enter that resistance area. The risk in this strategy is clearly that the markets blow through this level. If so, there is little resistance all the way up to 410 level, which would take Asia back to precrisis levels. Asia will eventually reach those levels and beyond. But markets do not always go up in a straight line and a real correction of up to 25% would, in the longer-term context, be extremely healthy.
In Tokyo this week there remains a huge discrepancy between foreign and Japanese attitudes toward the health of the Japanese economy. The foreigners have been the only category of net buyers in the Japanese stock market all year. This is driven by their optimistic view that the Japanese corporates have begun to restructure.
This view has so far paid off handsomely. Japan may be a comparative laggard relative to the stellar performance of Asian ex-Japan markets. But it has massively outperformed Europe, the other major equity universe accessible to international investors, as measured against the
Greed & Fear agrees with the view that the Japanese have begun to restructure. Still, it is instructive that many informed Japanese remain extremely cautious about how this restructuring will affect the economy. Their point of view is that the process has only just begun and is likely to lead to significantly higher unemployment if carried to its logical conclusion. The scale of retrenchment that needs to occur is clear from the fact that the share of wages as a percentage of Japanese national income is now at its highest level since records began to be compiled in 1955. This is despite the fact that nominal incomes have recently been declining, down 2% in fiscal 1998.
The bullish conclusion to draw from the new restructuring trend is that Japan will enjoy a period of jobless prosperity similar to what America enjoyed in the early 1990s before the U.S. economy ran on a consumption boom made possible by the bullish stock market. This will probably prove, ultimately, to be the case. Still, it is important in that labor continues to be shed. So far this seems to be the case, judging from the rising unemployment rate.
The risk is clearly that higher share prices cause the trend to slow. A second potential negative to watch out for is any fiscal drag stemming from any adverse market response, such as higher bond yields or the 10 trillion-yen supplementary budget that's likely to be announced in September. If this proves to be more public works spending to bail out the politically connected construction industry, it will clearly be negative. But if it consists of money to finance social safety nets to ease the process of labor-shedding, it will be a clear positive.
Another major positive is that Japanese monetary and fiscal authorities seem determined to keep up the stimulation using both monetary and fiscal means. The plans for another supplementary budget mean that deficit concerns will continue to play second fiddle. Likewise, the
Ministry of Finance
-ordered intervention in the foreign-exchange market shows a clear determination to prevent the yen from becoming too strong. Finally, the
Bank of Japan
shows no sign of relenting from its zero interest-rate policy. Since it implemented this policy in February, monetary base growth has accelerated to 5.6% year-on-year in June.
If monetary base growth begins to slow and if bank lending fails to revive, the Bank of Japan could well come under pressure later this year to do still more. That will mean more pressure to monetarize in terms of the direct purchase of bonds, which the central bank will ultimately find hard to resist.
Greed & Fear for now maintains a fully invested position for Asia ex-Japan. The only adjustment has been a slight reduction in Taiwan's overweight to adjust for the rise in the Korean market over the past month. Meanwhile, Greed & Fear's underweight position in Hong Kong is significantly less controversial in Japan than elsewhere in the investment universe.
Christopher Wood is the global emerging market strategist for ABN Amro and the author of The End of Japan Inc. (Simon & Schuster, 1994). Under no circumstances is this to be used or considered as an offer to sell, or a solicitation or recommendation of any offer to buy. While Wood cannot provide investment advice or recommendations, he welcomes your feedback at