Conclusion: Japanese Exports slowed again in August, highlighting additional concern that the island’s recovery is faltering. Moreover, the confluence of the strong yen and slow growth from the U.S. and Western Europe will continue to be a headwind for Japanese exports over the next 3-6 months.
Position: Short Japanese equities (EWJ); Short the Japanese yen (FXY)
If you didn’t know, now you know: Japanese exports rose 15.8% YoY in August – the slowest growth since last Deceber. August marks the sixth consecutive month of sequential deceleration of export growth on a YoY basis. On a seasonally adjusted basis exports fell (-2.3%) MoM. This marks the fourth consecutive decline on a monthly basis and the largest MoM decline since January 2009.
On a more granular level, Japanese exports to the U.S. – its second largest export destination at 16.4% to total – fell substantially on a sequential basis: +8.8% YoY in Aug. vs. +25.9% YoY in July. August also marked the first YoY decline in shipments of autos to the U.S. since October of 2009. This highlights two headwinds that will continue to restrict Japanese growth going forward – waning U.S. consumer demand and the painful appreciation of the yen.
Regarding the yen, Japanese exporters believe they can remain profitable if the yen trades at 92.90 per U.S. dollar or weaker, according to a Japanese Cabinet Ministry report. Since the start of the Japanese fiscal year on April 1st, however, the yen has traded an average of 89.02 – 3.88 less than their forecast. The spread, which we track using our proprietary Japanese Exporters Margin Kitty has been trending down throughout the entire period and closed at (-8.67) on Friday.
While we continue to have conviction that the yen will continue to weaken over the next 3-6 months due to (if nothing else) Japanese government intervention, we do not think intervention alone will be able to reverse the damage brought on by the yen’s recent strength. Speaking of, the strong yen is driving Japanese investment abroad, as exporters attempt to shield their profits from currency risk. Nissan is one of many Japanese exporters considering additional plants in Indonesia, Thailand, and other parts of SE Asia to counter this trend of currency strength. While it may provide reprieve for Japanese corporate profits, it will do so at the cost of exporting Japanese jobs to other countries further compounding the economies struggle to revive domestic demand.
In effect, both Japan’s exports and currency are likely to struggle going forward on a TREND duration. With trade accounting for more than half of Japan’s meager 1.5% expansion in 2Q10 (according to the Japanese Cabinet Office), we expect Japanese GDP growth to slow meaningfully from here.
To address the potential for a severe slowdown in the Japanese economy, Japanese politicians are likely to do what they’ve always done for the past two decades (to no avail, of course) – fire up the ‘ol stimulus. This morning, they are said to be considering an additional package worth 4.6 TRILLION yen ($54.6B). Prime Minister Naoto Kan’s administration is particularly excited about this round of stimulus, as it is unlikely to warrant any additional issuance in government debt:
- 2 TRILLION yen from greater-than-forecast tax receipts
- 1 TRILLION yen from savings on debt servicing
- 1.6 TRILLION yen from the previous fiscal budget
While we certainly applaud their relative fiscal restraint, we don’t think piling another 4.6 TRILLION yen of stimulus on top of the most recent 915 billion yen of stimulus will achieve the desired effects of avoiding slow(er) growth.
All said, Japan’s fiscal situation is in an “emergency state”, according to Japan’s Vice Finance Minister Fumihiko Igarashi. At Hedgeye, we have added the Japanese economy to the growing list (politicians, bureaucracy, demographics, pension funding ,etc.) of things in an “emergency state” within Japan. It should, then, come as no surprise to see the Nikkei 225 down 9.3% YTD, trailed only by the PIIGS, China, and Slovakia.
Darius Dale
Analyst
