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Position: Short Japan via the EWJ

The BOJ’s Tankan business confidence index data for March registered the lowest levels since inception in 1974 when it was released this morning.  The Tankan indices are calculated from surveys of a broad swath of Japanese private enterprise, representing a view on how favorable conditions are perceived to be near term. Unsurprisingly the manufacturing sector registered the most negative levels, arriving at -59 in the face of collapsed foreign demand. Ominously for Japanese unemployment levels (which yesterday registered at a three year high) and capital investments, the data showed conditions were worse for mid-sized and small companies which are less likely to receive government stimulus directly and have been particularly hard hit by the credit contraction.

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Non manufacturing segments are not being spared either as Japanese consumers return to the low spending levels that they adopted during the prior “lost decade”.  As with manufacturers, the sentiment among smaller consumer and service sector companies was significantly more negative than among larger ones.

As sentiment sinks, the Aso administration continues to hide details of the size and scope of the much heralded third stimulus package, which will be announced in the coming weeks.  This political strategy bears the strong risk of creating high expectations among investors who will inevitably be disappointed by the actual package. We retain a negative bias on the Japanese economy and see the primary driver for equities there, which we are short via EWJ, to be currency valuation. Only a weak Yen can push stocks higher in the absence of rebounding external demand.

Andrew Barber
Director

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