Littlestone’s Big 4 for ’14 – #3 Japan in 2014: Godzilla or Godzuki?
Will Japan finally be Abe-l to pull itself off the sick bed?
Japan in 2014. Raging monster or insignificant other?
A potentially very big year for Japan in 2014. Abe took power, won both houses and got his man in the BOJ. USD/JPY got a pulse but the hard work has only just begun for Abe & Co. The Japanese giant has shown signs of stirring but there’s still a sense that businesses are holding back and are still not overly keen on throwing caution to the wind and going all gung-ho into risk. And you can’t blame them after 20+ years of a stagnating deflating economy. What’s remarkable is that the way the country functions despite the economy being on life support. When following the fortunes of Japan over the last year it was a pretty easy trade. Each event of Abe’s rise to power was pretty much telegraphed as a done deal so getting in early and riding it out was a fantastic trade.
Round 2 of Abenomics isn’t going to be such a cake walk. The first event we have to deal with is the new savings regime which comes into effect tomorrow. Much like the UK’s ISA’s and PEP’s it’s a tax free investment vehicle designed for stocks and investments, not cash. The NISA (Nippon individual savings account) will offer a 5 year tax exemption on assets held within it and people can invest up to ¥1m a year for the first four years, either as a lump sum or via monthly investments. It’s designed to get Japanese savings hoarders buying into risk and Abe hopes it will also boost the economy.
So good news for the Nikkei then as everyone will go piling into stocks on the first trading day? Not so fast stock pickers! As usual there’s caveats. Existing stock holdings can’t be moved into the NISA. There’s no 3 year investment loss tax offset like there is on taxable savings and the investments have to be sold at the end of the 5 year period to benefit from the free tax (though can then be invested into another new NISA). Those that pay monthly into a stock fund will likely carry on as normal into the NISA. Those that hold long term investments may have to choose between holding what they’ve got and face the capital gains taxes at 20%, or flipping their investments into the new scheme. If people go the flipping route it should be a zero sum event but it may create some volatile moves.
What will move the market is if there’s a mass migration out of cash savings and into stocks and funds. Around 55% of savings is made up of cash and deposits and a big chunk of that is owned by the elderly. According to a survey earlier in the year only 15% of people knew that the new scheme was coming so there may still be a lot to be done to get people moving into it. Again it’s going to be a case of getting people to break long term habits. In the UK around 40% of households took up the UK savings vehicles and if the same number take it up in Japan it could mean further big gains for Japanese stocks. Twinned with the possibility of the economy picking up it could be a massive year for the Nikkei. Trading wise, right now, we might very well be at the bottom of the move at today’s levels. It’s on my radar now to look at any dips in the Nikkei as buying opportunities early in the year, but as Colin Reimer mentioned in the comments the other day, how willing will the Japanese be in buying into a market at five year highs remains to be seen.
So that’s one event we need to look out for. The next is the sales tax hike. Already there has been talk that companies are front running the hike by building inventories and doing as much business before the tax hits. This is likely to increase the nearer we get to d-day. The same thing happened here in the UK when we had the vat cut and then re-raise. Companies held off business until the cut came then ratcheted it up before it went back up. It all balances out in the end but it can lead to a short term distortion in data which is something we will have to bear in mind. This could provide a decent strategy to follow. If we see that businesses are front running the tax then we could get in early and be long ahead of possible better economic data as a result. When the new tax comes into force we could then potentially have a short term top as the market awaits the effects. If business shows signs of slowing after front running then we are likely to see those positive economic figures reverse and down we’ll go. For USD/JPY, I’ve already said that I will play the game from the long side but this event may have me switching to shorts for a few months as it plays out. After the initial month before/month after action I think it’s going to be 4-6 months before we see the real effects the tax has had. At this time we will get an idea of the next big direction for the yen. If the effects are positive (or less negative than expected) then we could be off to the races once again. On the much talked about BOJ stimulus in 2014 I believe they will hold off any moves until the effects of the tax hikes play out, unless the economy craps out in the meantime. This could put some pressure on USD/JPY if expectations are high for an early injection from the BOJ.
While my strategies and view are not initially tradable from day one it’s the way I look at fundamental situations to see where the next directions may be. It’s a constant program of mentally asking questions and ticking boxes as to whether a strategy or plan looks like coming to fruition. It’s probably of no use to very short term traders but even when I short term trade I always have my mind on the underlying fundamental picture. It’s served me well over the years (and has resulted in some big profitable trades) to have an idea of the events and their possible outcomes in the markets.
