18 Comments

thank you Russel very interesting insights on EM and Japan.do you think that the rapid rise in short term us interest rates relative to long term rate and now the inversion of yield curve have made it unprofitable for Japanese investors to borrow dollar in short term including swaps and buy safe us government bonds.so, there is incentive for Japanese investor to bring home some of their massive overseas currency holding. also, if BOJ being chased away from yield curve control these flows will reverse brining a wave of capital home to japan which will drive equity markets.

according to Jefferies nearly half of Japanese companies have net cash on their BS vs 22% in the US. This will drive the share buyback again.

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Thank you for the insight. How do figure Japanese equity holding by boj, factors into the overall dynamics suggested by your piece? (Quick google result on boj equity holding: https://en.macromicro.me/collections/59/jp-finance-relative/26280/jpy-boj-holding-etf)

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I guess that has been the BOJ policy is to use its power to set "market" prices in the most pro-capital way possible. So Yen is very weak, interest rates are very low, and it reduces liquidity in equity markets so that share buy backs work very well. All credit to Warren Buffett for acting on this

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Thanks for this; very interesting analysis.

One point, however, I think needs clarification.

The proportion of hourly paid or irregular workers in Japan has increased dramatically relative to salaried workers. Over the last 10 years, hourly wages have increased at least 50%, and in some regions/industries, more than that (with much of that increase coming in the last 5 years). Salaried workers in Japan are indeed feeling the pain. However blue-collar, independent, and other less structured workers, are doing just fine and have easily kept pace with inflation.

BOJ is penalising salarymen, for sure... but by no means all Japanese workers.

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Is there any data where I can see that? Last time I was in Japan I talked to english teachers who were still on the same wage rate as 30 years ago, and advertised rates at places like Yoshinoya still seemed to be about 1000 yean an hour

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I don't think you'd get applicants at 1,000/hour, certainly not in the cities (unless maybe you included staff accommodation or meals in the package). Convenience stores and small restaurants/bars are now around 1,200, having been around the 800/850 mark 10 years ago. It's a simple function of labour shortage (which also, btw, means that conditions - breaktimes, remote working possibilities, quality of staff accommodation, etc) have markedly improved, too). The formal sector is much less flexible so salaries have adjusted less (though again, terms and conditions have improved in order to retain staff).

Not sure where you'd find consolidated data but scrolling through some hiring sites might give you an idea.

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I am sure I can find somewhere to look. Thank you for picking this up

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nice piece indeed. My thinking is BoJ takes advantage of the cheap Yen to reduce their aggregate debts. Also, the moment is in hand for japan to be the international manufacturer again while China is onto the trade/ cold war situation. Now, strong shares buy back + Yen up swing sooner or later + high quality manufacturer products = great investment case. too good to be true ? Am I missing something here?

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As long as US keeps spending to avoid recession and China avoids devaluation- then China.should do well

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Great report on the Japanese stock and bond markets! I have a small investment in a Japanese all market index fund (FLJP). However, my personal finances are based in the U.S. and I am not sure where the Yen/Dollar exchange rate will go so stay away from big investments in Japan. It is nice, however, to see the nominal Nikkei price look healthy as it has recently.

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I agree JPY is cheap and food inflation will continue here. Bonkers BoJ will stay behind the curve so JPY will probably continue to stay cheap despite some FX interventions here and there. Simple example, I can have a great Japanese type meal here in Tokyo for JPY 1,500 (about USD 10 or EUR 10 now). Yup the BoJ doesn’t seem to care about food inflation. I think the BoJ won’t move unless the public in Japan forces change in politics. So rather than the JPY getting stronger, the price levels will have to go up here. As you probably know, Japanese are very patient people and will endure some more pain. Keep an eye on Kishida popularity though.

So what is the big trade in the still pro-capital Japan? Still just long Buffet’s trading houses and short JPY?

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So if I thought through that, the market getting spooked by higher rates sends the shares down again and then the big companies buy them back eventually stabilizing them until it gets so egregious that activists come after them or there’s a political change and Elizabeth Warren is Treasury Secretary?

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At some point sovereign bond investors are going to ask hard questions about those yields as well. When the bond market wakes up - then we see action

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Sorry to pepper you with ?s but does that mean they start not buying longer term bonds, sending the yields up? Might be a good piece to lay out possible ways this trend breaks.

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What I see is that food inflation in structural - which means that wage inflation is also structural. My working assumption is that this forces tighter monetary policy, as voters ask for more to be done. We are seeing tighter monetary policy - but we are also seeing share buybacks continue. But at some point, even Apple management will recognise share buybacks at high valuations are value destructive.

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Do you think US real yields going positive in May is going to change this? Say the fed hikes the 2 more times they predicted or is corporate management impervious?

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I think inflation is passing through a cyclical low, and about to go higher again. So market is going to be surprised at how high fed fund rate is going to get... But share buy backs may well continue...

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What would shareholders say if buybacks were done while earnings yield is below debt/bond yields? Wouldn't that cause a surge in interest expenses that ruins corporate profitability?

Do you have any data on corporate debt issuance of the FAANGs?

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