Japan’s Government Moves Allay Investor Concerns     

• Last week, the Japanese government at least showed investors and traders that they got the joke about their growing perception gap with investors, tradiers and speculators.
• The Nikkei 225 and JPY/USD rate reacted immediately, with the Nikkei 225 quickly recovering what it has lost in points since August highs (+/-1,000 points) and JPY/USD snapping back from JPY84 to JPY90.
• Yet it is far from clear that the Japanese government has won this cat and mouse game, as investors/traders/speculators are the cats while the Japanese government and BOJ are the mice. Japan still has a long way to go in plugging the JPY35 trillion or so supply-demand gap and structural deflation in Japan, as well as gaining respect from market participants.
• While the Japanese media was attributing the new-found buying demand for Japanese equities, it was actually buying by domestic investment trusts (mutual funds) and financial institutions that turned the tide. If anything, domestic investors had been even more bearish about the effectiveness of the new DPJ's economic policies than foreign investors
• Looking at Japan's neighbors, the ASEAN and north Asian economies are doing very well in bouncing back from the financial crisis of 2008, and should continue to do well even after extraordinary fiscal stimulus is removed. We see this as the real driver for stock prices in the region, not mere liquidity.
• For Japan's still very tentative recovery to take hold, it is important for Japanese companies to leverage demand in Asia and in emerging markets. While this business will involve some transition in profitability for Japanese firms because selling prices (and margins) are generally lower than on the premium products sold in the US and Europe, demand in US and Europe is already being lost to Asian and emerging market competitors, so there is really no choice.
• Going forward, it is likely that Japanese equities will continue to lag the global rally until such time that a major secular turning point is reached in US monetary policy, which is really the key to the strong yen.

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