Nothing Has Changed In Japan

By John Richardson

THE Nikkei Index has risen by more than 30% since November (see the chart below). Earlier this week, the Nikkei was at its highest level since September 2008.

 

Nikkei3.gifGlobal stock markets are, in general, of course, on a roll.

This is fantastic news for the day traders and the electronic traders, who, according to a Perth, Australia-based resources analyst, have played a much-bigger role in overall equity trading activities since the New Year.

“First of all, we had stock markets rallying on thin overall trading volumes over Christmas and early January. Because activity was so think it only took a relatively small number of players with a positive outlook to get the rallies going,” he said.

“Even now, overall volumes are nothing to write home about. Also of concern to me is the large number of day traders, and also extremely short-term electronic trades, in all the markets. This suggests an even more short term view of the fundamentals than usual – and that’s saying something, as markets have become incredibly short term in their outlook since 2008.”

The rally may have some legs in yet. This would offer further support to equities and commodity prices, including petrochemicals. Asian polyethylene (PE) prices were, for example, up by as much as $100/tonne for the week ending 1 February, according to ICIS pricing.

But as far as the blog can discern, last week’s PE increases were mainly driven by traders taking long positions, as demand amongst most end-users was weak due to the Chinese New Year.

A key factor, perhaps, remains the strength of real demand, and the extent of new supply, after the New Year.

Or maybe not. “You won’t get much traction for your ideas at the moment as everyone wants to believe there is a ray of light. This could, in itself, maintain the petrochemicals recovery,” said an executive with a global polyolefins producer. 

Returning to the subject of Japan, what has essentially changed about its economic outlook since November? Nothing….

All that has happened is Japan’s commitment to drive down the value of the yen. This hasn’t suddenly, magically, created lots of new babies to solve a demographic crisis (see chart below).

 

Japanpopulation.pngIn 2012, for the third year in a row, the Japanese population, according to this article in The Diplomat. The total decrease was 263,727, or 0.21% of the total population, representing approximately a 50% increase in number of individuals lost over the previous year.

Japanese government projections have shown that if current trends continue, today’s population of about 127 million will be halved by the end of the century.

The argument driving the rally in the Nikkei and export-focused company share prices is, of course, that a weaker Yen will boost exports. But many of the exports will be to Western markets, which are falling over their own demographic cliffs.

But it would unfair to only single out Japan’s contribution to what could well be a global currency war. As Reuters said in this article: “Japan’s plan to aggressively weaken the yen has been the most recent salvo. But that merely counters open-ended bond buying and dollar creation by the U.S. Federal Reserve, pound printing in Britain or even Swiss intervention to cap the franc.”

Meanwhile, the European Central Bank is the only one of the big four central banks unable or unwilling to create new cash and put a lid on its exchange rate.

“The euro has now soared 20% against Japan’s yen in just three months, 8 % on sterling and 7% on the dollar – the latter compounding gains against a host of dollar-pegged, emerging currencies,” continued Reuters.

“Morgan Stanley economist Elga Bartsch said there is a risk of the euro ‘overshooting’ and derailing the zone’s tentative stabilisation by sapping exports, capital expenditure and corporate profits.

The threat of further extreme appreciation has thrown the focus on the Euro zone’s “one size fits all” currency weakness.

“For example, Morgan Stanley’s estimate of euro/dollar ‘fair value’ – gleaned from relative inflation, growth, exports and labour costs – is $1.33 and only just below current levels,” added Reuters.

“But that masks huge gaps between ‘fair value’ assumptions for each euro member – stretching from $1.53 for Germany to $1.26 for Spain, $1.19 for Italy and as low as $1.07 for Greece.

“And it highlights the daunting task facing the weakest euro members absorbing an exchange rate squeeze after years of back-breaking wage and fiscal adjustments to recoup competitiveness.”

Please, please be careful out there.

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