When we last published our extended thoughts on Japan, we openly debated the outlook for the “Abenomics Trade” (i.e. SHORT Japanese yen + LONG Japanese equities) with respect to the intermediate term. To recap the pros and cons of allocating capital to this investment strategy:
- A likely transition from Quad #3 (i.e. growth slowing as inflation accelerates) in 2Q14 to Quad #1 (i.e. growth accelerating as inflation decelerates) in 3Q14
- A re-risking of the GPIF portfolio
- Favorable micro tailwinds
- Abe’s “Third Arrow” is more talk; less walk
- Easier Fed + Japanese monetary policy vacuum = stronger JPY
For those of you who like to get into the weeds on the numbers, please refer to our JUN 30 note titled “JAPAN POLICY VACUUM PART II?” for a deeper discussion of those puts and takes. It might not even be worth your time, however, as not much has changed since then.
Specifically, the BoJ’s latest policy meeting (statement out earlier today) was yet another nonevent. It left its QQE program unchanged, in line with the entire analyst community and the wording of the statement was broadly in line with previous guidance. Moreover, BoJ Governor Haruhiko Kuroda reiterated the board’s sanguine view of the Japanese economy and its progress on achieving #StructuralInflation in Japan.
In fact, a marginal tinkering of the FY14 real GDP growth estimate was the only update to their official guidance:
- Real GDP:
- FY14: +1%, down -10bps vs. the prior forecast
- FY15: +1.5%, unchanged vs. the prior forecast
- FY16: +1.3%, unchanged vs. the prior forecast
- CPI (excluding the impact of the consumption tax hike):
- FY14: +1.3%, unchanged vs. the prior forecast
- FY15: +1.9%, unchanged vs. the prior forecast
- FY16: +2.1%, unchanged vs. the prior forecast
The key takeaway for investors here is that the resiliency of the Japanese economy post the APR consumption tax hike coupled with no material change in the BoJ’s own outlook for inflation roughly equates to an incremental delay in the timing of incremental easing (i.e. expanding their QQE program).
Speaking to that resiliency, the preponderance of Japanese high-frequency growth data is now accelerating on a trend basis as of JUN:
This sequential momentum is highly likely to support a bounce in real GDP off an easier compare here in 3Q14. To the extent that catalyst materializes, we could now be looking at the DEC 18-19 meeting or early-2015 for the timing of the BoJ’s next move, which would likely follow two consecutive quarters of decelerating CPI readings, or at least be in response to a dovish policy delta out of the Federal Reserve that impacts the currency markets.
A lot could happen between now and then, so, net-net, we do not think it’s appropriate for investors to gross up their exposures to the Abenomics Trade in either direction at the current juncture. While our late-MAY call for investors to cover Abenomics shorts was highly appropriate (e.g. the Nikkei 225 Index is up +4.9% since then), the outlook from here remains unclear.
As such, we reiterate our call of not having a high-conviction call on Japan right now. Up until very recently, we’ve had one since 4Q12 (in both directions of the Abenomics Trade), so we’re more than content to stand pat and let the data instruct our next move. Why force it?
Have a great night,
Associate: Macro Team