Conclusion: As predicted, the silence of Lunar New Year brought forth a largely uneventful week in Asia. Ahead of next week’s headlines, which will hit fast and furious amid a bevy of economic data releases, we take a moment to briefly focus on Japan from a fiscal policy perspective – especially in light of the negative long-term fundamentals that were reported this week.


Virtual Portfolio Positions in Asia: Long Chinese equities (CAF); Short Indian equities (INP); Short Japanese equities (EWJ).



All % moves week-over-week unless otherwise specified.

    • Median: +0.8%; High: India +3%
    • Low: Philippines -1.4%
    • Callout: Thailand +12.1% over the last three months vs. a regional median of +0.1%
  • FX (vs. USD)
    • Median: +1.3%
    • High: Malaysian ringgit and New Zealand dollar +2.2%
    • Low: Indonesian rupiah -0.2%
    • Callout: New Zealand dollar +11.3% over the last two months vs. a regional median of -0.1%
    • High: Philippines +51bps
    • Low: Indonesia -10bps
    • Callout: India -92bps over the last six months
    • High: India +19bps
    • Low: Indonesia -9bps
    • Callout: Australia +15bps YTD
    • High: India +19bps
    • Low: Philippines -51bps
    • Callout: Australia +15bps YTD
  • 5YR CDS
    • Median: -3.9%
    • High: China, Thailand, S. Korea, and Thailand all flat wk/wk
    • Low: Indonesia -9.9%
    • Callout: Japan +23.6% over the last three months vs. a regional median of +3.2%
    • Median: flat wk/wk
    • High: India +12bps
    • Low: Singapore 4bps
    • Callout: China -61bps/-28.3% over the last three months vs. a regional median of -1.3%
    • Median: flat wk/wk
    • High: India +40bps
    • Low: Thailand -25bps
    • Callout: India +137bps/+17% over the last six months vs. a regional median of -1%
    • The gradual receding of European sovereign debt risk since NOV has been supportive of foreign inflows into Asian capital markets, with the JPM Asian Dollar Index garnering a +97% correlation to the MSCI AC Asia Pacific Equity Index on a six-week basis.

Full price and performance tables can be found at the conclusion of this note.


 On Monday, we’ll be releasing the second installment of our Japan’s Jugular thesis, which details our long-term research and risk management views on the country.  The following charts are a sneak peak at what we promise will be a thought-provoking slide deck:

The year 2012 has the potential to be a rather volatile year for the JGB market, with a few key months worth monitoring from a bond auction perspective:

Weekly Asia Risk Monitor: Silent, but Japan - 1

Relative widening in the CDS markets suggests that this incremental credit risk is being priced in, on the margin:

Weekly Asia Risk Monitor: Silent, but Japan - 3

If Japan does face an environment of sovereign debt challenges this year, the Bank of Japan has limited resources to step in and calm the market under current statutes (which, as we’ve learned, can always be changed mid-game):

Weekly Asia Risk Monitor: Silent, but Japan - 2


Growth Slowing’s Bottom:

  • Japan: Export growth slowed in DEC to -8% YoY vs. -4.5% prior. The country posted its first annual trade deficit since 1980, driven by the strong yen and weak external demand on the export front and a surge in post-tsunami energy imports. Japanese nuclear power generation remains -85.3% below pre-crisis levels and will face structural political headwinds going forward.
  • Japan: Retail Sales growth accelerated in DEC +2.5 YoY vs. -2.2% prior, as Japanese consumers (some flush w/ insurance payouts) took advantage of the first post-crisis Holiday Season to treat themselves.
  • Japan: The Bank of Japan lowered its economic growth outlook for FY12 to +2% from +2.2% prior while maintaining is +0.1% CPI target.
  • Hong Kong: Export growth slowed in DEC to +7.4% YoY vs. +2% prior.
  • South Korea: Real GDP came in essentially flat on a YoY basis in 4Q: +3.4% vs. +3.5%. On a QoQ basis, growth slowed to +0.4% vs. +0.8%.
  • South Korea: Korea’s JAN Business Survey came in slightly better than the DEC version, with the Manufacturing Index ticking up to 81 (from 79) and Non-Manufacturing Index holding flat at 79.
  • Thailand: Rebounding from generational flooding, Thailand’s Manufacturing Production growth accelerated in DEC to -25.8% YoY vs. -47.5% prior. Capacity Utilization ticked up as well: 52.3% vs. 40.5% prior.

King Dollar:

  • Japan: CPI accelerated in DEC to -0.2% YoY vs. -0.5%. Any erosion of Japan’s real interest rate advantage applies pressure, on the margin, upon JPY/JGB assets relative to the USD/USTs.
  • India: Amid receding inflation, the Reserve Bank of India lowered the country’s Cash Reserve Ratio -50bps to 5.5%, which should add around 320B rupees ($6.4B) in liquidity for Indian banks. Ironically, Indian O/N Interbank Rate closed up +40bps wk/wk, indicating that at least some lenders were anticipating perhaps a greater degree of easing (rate cuts). Refer to our Thursday note titled “Re-Shorting India: INP Trade Update” for more details regarding the scope for monetary easing in India.
  • Singapore: CPI slowed in DEC to +5.5% YoY vs. +5.7% prior. More importantly, the Monetary Authority of Singapore said that it expects inflation to average +2.5-3.5% in 2012 – a slowdown that would give it room to ease by revaluating the Singapore dollar’s USD-peg lower.
  • Thailand: The Bank of Thailand cut the country’s Benchmark Interest Rate -25bps to 3%.
  • Australia: Australia came in with some mixed-to-slightly dovish 4Q inflation data: CPI slowed to +3.1% YoY from +3.5% prior; Core CPI accelerated to +2.6% YoY vs. +2.4% prior; and PPI accelerated to +2.9% YoY vs. +2.7% prior. From a monetary policy perspective, this data doesn’t force the RBA to react dramatically in either direction.


  • China: Xi Jinping, the likely candidate to replace Hu Jintao as China’s next president in MAR '13, will likely be a catalyst for China to take additional steps toward free-market capitalism, based upon his economically liberal reforms as party chief of the Zhejiang province.
  • China: Chinese property prices need to decline an additional -30% in various areas to reach a “reasonable” level, according to He Keng, who serves as deputy director of the National People’s Congress. This is in-line with our view that China will keep its “foot on the brake” with regards to its property market for the foreseeable future.
  • Japan: Per the Japanese Cabinet Office, the country will likely miss its goal of balancing the budget by at least fiscal 2020 – even if it doubles the consumption tax to 10%! Slow projected growth (+1% per annum) and an unavoidable surge in entitlement spending will continue to grow Japan’s sovereign debt load well beyond the ¥1,086,000,000,000,000 (QUADRILLION) its projected to rise to in FY13.
  • Japan: Understanding the growing urgency to tackle the challenges above, the Diet is debating a DPJ-backed bill that would increase the consumption tax +300bps to 8% in 2014 (followed by another +200bps hike in 2015). The bill, which is opposed by 60% of Japanese voters, is unlikely to pass, as LDP appears to not want Noda’s administration to take credit for attempting to finally tackle the nation’s fiscal imbalances despite having similar goals in mind. Amid the political squabbling, which Standard & Poor’s cited as a reason for another [potential] downgrade, the Japanese public assigns a 17 and 16% approval rating for the DPJ and LDP, respectively.


Key economic data releases and policy announcements:

    • Philippines: 4Q Real GDP
    • New Zealand: DEC Services PMI
    • Japan: JAN Manufacturing PMI ; DEC: Unemployment Rate; DEC: Industrial Production
    • South Korea: DEC Industrial Production; DEC Service Industry Output
    • Singapore: 4Q Unemployment Rate
    • Taiwan: DEC Unemployment Rate
    • Australia: DEC NAB Business Sentiment; DEC Private Sector Credit
    • China: JAN Manufacturing PMI (2x)
    • Japan: DEC: Construction Orders; DEC Housing Starts; JAN Small Business Confidence
    • India: JAN Manufacturing PMI
    • South Korea: JAN CPI; JAN Manufacturing PMI; JAN Trade Data
    • Indonesia: JAN CPI; DEC Trade Data; JAN Consumer Confidence (2x)
    • Thailand: DEC: Business Sentiment Index; DEC Trade Data; JAN CPI
    • Taiwan: 4Q Real GDP; JAN Manufacturing PMI
    • Australia: JAN Manufacturing PMI; DEC New Home Sales; 4Q House Price Index
    • Malaysia: Monetary Policy Decision
    • Japan: JAN Vehicle Sales; JAN Monetary Base
    • India: DEC Trade Data
    • Singapore: JAN Manufacturing PMI
    • Australia: DEC Trade Balance
    • China: JAN Services PMI (2x)
    • Hong Kong: DEC Retail Sales; JAN Manufacturing PMI
    • India: JAN Services PMI
    • Australia: JAN Services PMI
    • None

Darius Dale


Weekly Asia Risk Monitor: Silent, but Japan - 4

Weekly Asia Risk Monitor: Silent, but Japan - 5

Weekly Asia Risk Monitor: Silent, but Japan - 6

Weekly Asia Risk Monitor: Silent, but Japan - 7

Weekly Asia Risk Monitor: Silent, but Japan - 8

Weekly Asia Risk Monitor: Silent, but Japan - 9

Weekly Asia Risk Monitor: Silent, but Japan - 10

Weekly Asia Risk Monitor: Silent, but Japan - 11