Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 30 May 2017 at 11:45 GMT

Is the sun rising over Japan again? — #SaxoStrats

Head of Equity Strategy / Saxo Bank
  • Japanese nominal GDP back to 1997 highs
  • Unemployment sat at 2.8% in April 2017
  • Data show Japan poised for inflation 'liftoff'

Land of the rising charts? Photo: Shutterstock

By Peter Garnry

Listeners of our daily morning call will know that we have expressed positive views on European and Japanese equities this year. In this brief update, we will show a few charts highlighting a bullish case for Japanese equities over the coming years.

Looking at the data, Japan's nominal GDP is back to highs not seen since Q4 1997 driven by economic policies introduced in December 2012 by prime minister Shinzo Abe. The policy marks a coordinated effort by the government and central bank to stimulate demand and increase nominal GDP growth (as a country's debt structure is not sustainable unless there is positive nominal GDP growth). 

Since Q4 2012, nominal GDP is up 9.4% or 2.1% annualised – the fastest pace since the period between 1993-98 that saw the last sustainable expansion in Japan.

Japanese GDP at current prices
Japan nominal GDP

Source: Bloomberg

The unemployment rate was 2.8% in April, down from 5.5% at the peak in July 2009. It's also the lowest rate since November 1994 but at the same time core CPI was at minus 0.3% (year-over-year) in April, so despite the tightest labour market in almost 25 years there is no inflationary pressure. 

If you look, however, at the historical relationship between the unemployment rate and core CPI, then you can see that Japan is getting close to the inflection point for a liftoff in inflation. 

If this happens it will have big implications for bonds (lower) and equities (higher).

Japan's phillips curve

Source: Bloomberg and Saxo Bank

Since the introduction of Abenomics, the TOPIX Total Return Index is up 136% (or 20.7% annualised), outperforming the MSCI World Index (local currency) by 26 percentage points over the same period. 

Japanese equities are trading at a valuation below the world average and given the macro dynamics and underlying momentum, we believe Japanese equities will continue to outperform their global counterparts.

TOPIX total return
Source: Bloomberg 

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank 
Mekong Mekong
I concur...I am looking for an entry point in the currency hedged DXJ etf, maybe selling some cash covered puts on any meaningful drawdown.
Market Predator Market Predator
Nice piece, thanks for mentioning in today's GMC broadcasting.


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