Friday, September 11, 2009

Obamafying Japan, The Democratic Party of Japan



    Overview: With the Democratic Party of Japan's (DPJ) historic win over the Liberal Democratic Party (LDP) in Japan's lower house elections, Japan is bracing for a short-term rise in stocks and bond yields. The DPJ has made campaign promises that will necessitate a great deal of government spending. This spending is expected to push up consumer consumption and environmental stocks. However, the spending is expected to be financed by the government issuing more bonds (despite the DPJ's claims that they won't issue new bonds), weighing on bond prices and pushing up yields. However, in the longer-term, doubts about the DPJ's ability to deliver on their policies may cause the stock market gains to eventually unravel.

    Impact on Currency: Continued Yen Strength

  • Immediate market impact: The Japanese Yen opened strong against the U.S. dollar after the DPJ election win, rising to 92.90 from 93.60 and strengthened further to 92.67 by the close of Tokyo trading . The yen also strengthened against the Euro to 132.95 from 133.85 in the early morning and saw 132.47 by the end of the day in Japan.
  • The U.S. dollar has fallen 20% against the Japanese yen since June 2007.
  • As an export-driven economy, Japan's Ministry of Finance has intervened in the past to drive down the yen and protect profits at companies like Sony and Toyota.
  • However, members of the DPJ are saying they have changed their stance on intervention, stating that the party has high confidence in the U.S. dollar and suggesting they will only use intervention to counter abnormal currency moves.
  • There is skepticism to these claims as automakers and electric appliance manufacturers have been some of the DPJ's biggest supporters.
  • Impact on Bonds: Rising Yields

  • Immediate market impact: Japan's 10-year government bonds opened lower after the DPJ victory. The 10-year JGBs were trading down 0.089 and yielding 1.32%, but reversed course and ended the day higher yielding 1.31%.
  • Despite the DPJ's claims to be able to finance their spending programs through "hidden treasures" (plundering LDP government slush funds and cutting wasteful spending), it is unlikely that this can be a sustainable source of financing and the DPJ will ultimately have to increase JGB issuance significantly.
  • Robert Alan Feldman, chief economist and co-director of Japan research at Morgan Stanley, says "The DPJ has no clear stance on monetary policy. There could be disruptive impact if senior leaders call for rate hikes in order to improve the income of depositors. Feldman goes on to point out that the DPJ also has no plans for deficit reduction".
  • Impact on Stocks: Liquidity driven gains (mostly priced in already)

  • Immediate market impact: After the DPJ election win, the Nikkei 225 Average opened with a 1.9% gain to 10,736 and the Topix gained 1.5% to 983.5. As the trading day wore on, enthusiasm began to wane and the impact of the yen's strength took the market down to close lower on the day. The Nikkei 225 closed 40 basis points lower to 10,492 and the Topix fell almost 40 basis points to 965.
  • With a DPJ manifesto that focuses on increasing household disposable income by 20%, a DPJ win should give consumption stocks a boost. These stocks would include the DPJ's supporters, automakers and electric appliance manufacturers, but domestic demand stocks in general should benefit. However, with a 14.2% run up in the Topix between July 13 and August 14, these gains are already priced into the equity market.
  • Retailers, environmental companies and child-related companies will be direct beneficiaries of DPJ spending programs.
Despite the euphoria, by electing the Democrats, its a victory for democracy, it shows that now there is a genuine alternative, a genuine two party system, and that there will be more check and balance, and hopefully better transparency. In terms of dragging the economy and the stock market from its doldrums, thats another thing altogether. As good as the feeling is, unless the Japanese go out and spend, nothing is ever going to change. That being a constant, then Japan will only move based on global demand for their exports and foreign funds inflow into investments (not now obviously).


p/s photos: Joanna Peh

1 comment:

Kian Pin said...

It's Joanne Peh, Dali.