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Technical and Fundamental Analysis of the Japanese Economy

Post a Comment October 29, 2009 – 11:56 am |   | Permalink |  Print This Post |

28 October 2009: Dow Jones Industrials Chart

Dow Jones Chart 28 Oct 2009: Testing the 60 Day Moving Average

Nikkei Chart

Nikkei Chart 28 Oct 2009: Failed to break above the 60 Moving Average

The Nikkei remains the weakest index by far, remaining one gear below the rest of the world - it failed to break above the 60 day moving average whilst the Dow (and FTSE and DAX) are at the critical psychological support zone. Support is only support until it is broken, then the psychological tables turn and it becomes resistance.

Regardless of the fundamental reasons between the soundness of the Japanese economy vs the rest of the world, in the short term we expect a correction. Note that by “correction” we do not mean that the Nikkei will rally, but by the fact that the gap between Japan and the rest of the indices to narrow.

Aging population (hence less tax revenue for the Japanese government) and its well known reputation of having the largest public debt in the industrialised world 225% of GDP does not bode well for Japan. And the worlds #1 debtor is also owed alot of money by the worlds #3 biggest debtor, the US. As the population ages and tax revenue goes down, many believe the governement will have to raise taxes and/or interest rates - which will be bad for the economy.

The Bulls and Bears on Japan’s Economy:

Bearish in Japan: Mike Sherlock

Marc Faber : Bullish

Jim Rogers (2006) view on Japan : More comfortable than I am with those in the US and many other places. The Japanese have huge business interests in China and that makes it one of the best ways to play China. They also moved a lot of their manufacturing to southeast Asia to cut costs, so the profits of the Japanese companies are continuing to do well. Maybe the workers in Japan don’t like the fact that the factories are now in Indonesia or Vietnam, or somewhere, but as far as the Japanese companies are concerned, this kind of move enhances their profitability. They are also not as dependent on the US as they used to be. Thirty years ago, I think something like 45% of their trade was in the US, but that’s shifted. Now around 45% of Japan’s trade is with Asia. So there has been a dramatic change in the last 30 years.

The New Government by the Economist.com

JAPAN’S nearest neighbours have long been less ready than has the rest of Asia to forgive and forget the country’s aggressive past: a brutal colonisation of Korea in 1905-45 and a creeping occupation of China from 1931 leading to total war. Both projects were pursued ruthlessly and entailed civilian massacres, torture and slavery in factories, mines and military brothels.

So Yukio Hatoyama, Japan’s new prime minister, has pleased the neighbours by promising that rule by his Democratic Party of Japan would transform Japan’s relations with them. He made the pledge in both Seoul, where he met South Korea’s president, Lee Myung-bak, on October 8th, and then in Beijing at a three-way summit with China’s leaders. Unlike the weasel-worded Liberal Democratic Party, which long ran the country, Mr Hatoyama’s new government, he says, “has the courage to face up to history.”

Both Mr Lee and China’s prime minister, Wen Jiabao, were delighted. Dealing honestly with historical matters, they affirmed, would make it much easier to tackle contemporary challenges together—notably, getting North Korea to give up its nukes, and deepening economic co-operation. Mr Lee said Mr Hatoyama had opened the way for “future-oriented relations”. The talk now is of reviving old plans for an undersea tunnel linking South Korea and Japan. Emperor Akihito may visit South Korea, a first. Both South Korea and China have applauded Japan’s proposal for a jointly compiled history textbook.

Japan has declined since 1989 and hit a recent low of 7000s from 30000s. The last two lost decades have defied the statistical “fact” that if one were to invest in an equity index over the long term, one would outperform other asset classes. That strategy clearly would have been disastrous for anyone investing in Japan. We think from a very macro perspective, the next twenty years will see some sort of catch up. If anything, we doubt Japan would go significantly lower than the recent low. We are not bullish on Japan, but we are not as bearish as everyone else. Sure, Korea, Taiwan, China and India are the favourite Asian markets most likely to outperform a more mature market such as Japan.

Go Japan.