Monday, 13 May 2013

Oriental Express...

Japan continues to light the path for equity market. The breathtaking performance of Japanese stocks reflects the dramatic influence monetary policy can have on asset prices. Japan is the best performing major market month to date and, in yen terms, the Nikkei is up 70% since the mid-November unofficial launch of Abenomics (but still down -27% since the beginning of 2007).

Since November the year-on-year expansion of M2 money supply has risen from 2.1% to 3.3%, while M3 has risen from 1.9% to 2.6%[i]. Are these monetary factors having any impact on the underlying economy? March saw the first potential signs of a narrowing of the trade balance following the Abenomic 20% fall in the trade-weighted yen. The improvement in inflation, however, is barely perceptible. Consumer prices fell -0.7% over the year to April 2013 but, on the positive side, that is a faster pace of decline than wages are suffering, which hints at an improvement in purchasing power. These are volatile data and so it remains to be seen whether real incomes can rise meaningfully.
Japanese retail sales growth remains negative. With wages falling slower than consumer prices, higher input costs (because of the yen’s depreciation) and retail sales contracting, corporate margins look increasingly stretched. More positively, overseas profits translated back into yen will be inflated by the weak currency, and sensible Japanese companies will have hedged their input prices to some degree, supporting profits until domestic sales grow.





[i] M2 is a narrow definition of money as cash in circulation, on deposit, or reflected by certificates of deposit. M3 incorporates deposits at savings institutions.

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