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Takeaway: We reiterate our call for continued consolidation in the “Abenomics Trade” with respect to the intermediate term.

CONCLUSIONS:

  1. We reiterate our call for continued consolidation in the “Abenomics Trade” (i.e. short JPY/long Japanese equities) with respect to the intermediate term. We continue to think both the fundamentals and the crowded nature of positioning in this trade warrant said consolidation.
  2. Specifically, our models call for Japanese economic growth to slow sharply here in 2Q (in line with official estimates), which should weigh on structural inflation expectations and risk appetite among Japanese investors – effectively underpinning a domestic bid for the JPY. Refer to our 2/19 note titled, “MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE?” to review this thesis in more detail.
  3. Externally, we continue to pound the table on the non-consensus view we’ve held all year: accelerating inflation will slow domestic economic growth, at the margins, throughout the balance of 2014. Furthermore, we anticipate that this catalyst will result in decidedly easier monetary policy out of the Federal Reserve – which may manifest in particularly dovish forward rate guidance, or an outright “un-taper” by the mid-to-late summer. Refer to our 4/16 note titled, “10 SCARY CHARTS ON US GROWTH; 5 NOT-SO-SCARY CHARTS ON CHINESE GROWTH” to review this thesis in more detail.
  4. The catalysts outlined in point #3 should continue to result in global selling pressure on the USD – which continues to careen to the downside as a leading indicator for this fundamental backdrop. That’s directly bullish for peer currencies, including the JPY; what’s bullish for the JPY continues to be bearish for the Japanese equity market given the tight inverse correlation that remains in place (YTD r² = 0.70).
  5. Long-term/low-turnover investors should continue to remain in the trade or remain on the sidelines in advance of what we anticipate will be far better entry prices on the short side of the JPY and long side of the Nikkei/TOPIX at some point over the intermediate term. When analyzed in the context of our forecasts for Japanese GDP and CPI, the BoJ’s downwardly revised growth forecasts and stagnant inflation forecasts at today’s non-event BoJ meeting lead us to believe that they are likely to expand their QQE program sometime in mid-to-late 3Q – well after it has become clear to consensus that the Yellen Fed isn’t the hawkish institution consensus currently assumes it is.

JAPAN GIP MODEL

STAY SHORT OF CONSENSUS ON ABENOMICS - JAPAN

STAY SHORT OF CONSENSUS ON ABENOMICS - 1

STAY SHORT OF CONSENSUS ON ABENOMICS - 2

STAY SHORT OF CONSENSUS ON ABENOMICS - 3

STAY SHORT OF CONSENSUS ON ABENOMICS - 4

US GIP MODEL

STAY SHORT OF CONSENSUS ON ABENOMICS - UNITED STATES

STAY SHORT OF CONSENSUS ON ABENOMICS - GROWTH

STAY SHORT OF CONSENSUS ON ABENOMICS - GDP COMPS

STAY SHORT OF CONSENSUS ON ABENOMICS - INFLATION

STAY SHORT OF CONSENSUS ON ABENOMICS - CPI COMPS

RECENT JAPANESE HIGH-FREQUENCY ECONOMIC DATA

Industrial Production trends cooling off:

STAY SHORT OF CONSENSUS ON ABENOMICS - 6

Retail Sales pull-forward ahead of the April 1st consumption tax hike:

STAY SHORT OF CONSENSUS ON ABENOMICS - 7

Manufacturing PMI tanking as Abenomics fails to deliver the necessary structural reforms that can sustain Japan’s economic recovery:

STAY SHORT OF CONSENSUS ON ABENOMICS - 9

Services PMI trends decelerating from apparent frictional resistance:

STAY SHORT OF CONSENSUS ON ABENOMICS - 10

Consumer Confidence tanking as rising inflation takes a healthy bite out of the consumer’s wallet:

STAY SHORT OF CONSENSUS ON ABENOMICS - 11

Business Confidence following suit as the consumption tax hike is spread throughout the supply chain:

STAY SHORT OF CONSENSUS ON ABENOMICS - 12

Export growth mirroring the dollar/yen rate to some degree:

STAY SHORT OF CONSENSUS ON ABENOMICS - 13

Import growth surprisingly cooling in the YTD, but ripping alongside global energy prices in the most recent month:

STAY SHORT OF CONSENSUS ON ABENOMICS - 14

Inflation continues to accelerate and is poised to gap up as the consumption tax is largely passed on to consumers:

STAY SHORT OF CONSENSUS ON ABENOMICS - 15

Real wages are feeling the pinch of stingy Japanese corporations and policies to tax & inflate out of Tokyo:

STAY SHORT OF CONSENSUS ON ABENOMICS - 16

Feel free to ping us with any follow-up questions. Have a wonderful evening,

DD

Darius Dale

Associate: Macro Team