Japan: The Focus is Exports to Asia     

• Despite all of the disparaging remarks foreign investors make about Japan, rumors of asset managers exiting from Japan stocks totally, or professing little interest in Japan as an investible market and having little confidence in Japan's announced GDP numbers, foreign investors en masse  continue to be net buyers of Japanese equities.
• One reason is that Euroland is looking even worse these days, with GDP growth in the region expected to limp along at 0.7% in 2010 coming off one of the most serious global recessions in the post war period. Further, the Euro sovereign debt issue is not likely to be solved that easily. 
• However, weekly net foreign buying in the JPY100 billion range is not enough to ensure a positive bias in Japanese stock prices, as domestic banks and corporates continue to unload their cross-holdings of Japanese stock to meet more stringent BIS bank capital requirements, and in preparation to adopt International Financial Accounting standards, particularly comprehensive earnings reporting, which will include market gains/losses on securities held.
• Last November, investors (including yours truly) began to suspect that diverging monetary stances between the US Fed (exit strategy) and the BOJ (do nothing) would result in a significantly weaker JPY, which would be bullish for severely lagging Japanese equities.
• Some scenarios had JPY weakening to below JPY100/USD by March 2011 and to JPY110/USD by March 2012. Combined with an Asia-led export recovery, such a move could push the Nikkei 225 to the 12,000 level.
• By February 2010, however, foreign investor enthusiasm/interest in Japanese stocks had already waned. Japanese stock prices virtually ignored the headline 4.6% annualized growth in Japan’s GDP for the October-December 2009 quarter. With 20:20 hind vision, the catch-up rally from last November was already discounting this uptick in growth. 
• On the other hand, we believe the sharp recovery in exports on a strong rebound in Asia demand is not being fully appreciated in current stock prices. 

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