Relatively Speaking, Japan Doesn't Look So Bad Now     

• Financial markets are now in transition, trying to return to normal, but still plagued by sovereign debt issues, a possible property bubble in China, and still fragile, increasingly divergent, economic recoveries.
• For all the criticism aimed at the US Fed, it still has the most credibility by far of the world’s developed country central banks. The Fed has a clear exit strategy, and is carefully communicating this strategy as it moves to exit extraordinary liquidity support and a balance sheet swollen from preventing US and global financial market meltdown. That doesn't mean however that it too could not drop the ball on its exit strategy.
• The Euro, Euro stocks and bond markets have broken down through 200-day moving average support and entered bear markets of uncertain length, while essentially all other risk trades (stocks, commodities and emerging market investments) are testing medium-term resistance as well.
• Given the massive gains in emerging markets in 2009, the first knee-jerk reaction is to take profits first and re-examine the situation. However, we still see emerging equity and markets (with perhaps the exception of China) as well as currencies completing the transition first and with the least damage.
• Compared to the Euro sovereign risk debacle, Japan is not looking so bad now. December quarter GDP growth, out this week, is expected to top 3.5% annualized after 1.3% annualized growth in the September quarter. Compared to sub 1% growth in Euroland, this looks relatively robust.
• However, the rebound is almost entirely due to Japanese companies finally getting inventories under control, and positive growth in exports to Asia centering on China. Exports to the rest of the world, however, are still weak, and margins are squeezed by yen strength against USD and now the Euro as well. Further, domestic demand is almost non-existent. As a result, March 2010 profit growth is looking like a tepid 8%, coming off one of the deepest declines in profits in the post war period.
• Consequently, the Nikkei 225 is still struggling to hold 10,000.

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