“The 94% Plunge That Shows Abenomics is Losing Global Investors”

“Foreign investors have had just about enough of Abenomics. After pumping record amounts of cash into Japanese shares last year, they’ve hardly added to holdings in 2014. Inflows are down -94% this year to 898 billion Yen ($7.5 billion), on pace for the smallest annual amount since the 2008 global financial crisis. The month of April 2013 alone registered almost three times as much foreign investment in the stock market as all of 2014. Roger: Buying Japan stocks is like buying soybean futures without stops. Traders and investors doing this now could get a nasty surprise in Q-1 of 2015.

These figures provide the clearest look at how global investors have become disillusioned with Prime Minister Shinzo Abe after he pushed through a tax increase in April that sent Japan into recession. Fund managers from Sumitomo Mitsui Trust Bank Ltd. to MV Financial say to lure investors back, Abe needs to move beyond short-term stimulus and start enacting the structural changes he laid out in his initial plan, dubbed Abenomics, to end Japan’s two-decade economic malaise.

“We need to see a framework where growth isn’t dependent on monetary easing,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust, which oversees $325 billion in assets. “If not growth then at least a way to increase productivity. For now there’s nothing like that, so I imagine it’ll be hard for stocks to keep going higher and for foreigners to take an interest in them.” Roger: Japan has two huge unrecoverable problems; (1) Massive government bond debts at 270% of GDP and too many dead zombie national companies on government bond life support since the 1989 crash. If both problems are solved Japan is solvent. The answer is there is no answer but to bite the bullet and take the crash…a political suicide.

Purchases of the nation’s shares through December 19 by investors outside Japan were less than a tenth of the 15.1 trillion Yen they bought last year, according to data from the Tokyo Stock Exchange. Trust banks, which typically trade on behalf of pension funds, added 2.7 trillion Yen, after offloading about 4 trillion Yen of equities in 2013. Individuals were net sellers for a fourth straight year. Roger: A 90% cut by foreign buyers of Japanese shares signals a run in fear to security. Most are going to U.S. paper or U.S. dollars which are ok for now but for now long?

 “Where is the Japanese Facebook? Where is the Japanese Google?” Katrina Lamb, head of investment strategy and research at MV Financial in Bethesda, Maryland, said.  The firm oversees $500 million and has been avoiding Japanese stocks in its international portfolios. “They have lost their place as global leaders. The potential exists in Japan for recapturing some of that, but it requires profound changes and changes are just not something that Japanese are good at.”

Foreigners were more optimistic in 2013, making record purchases of Japanese equities as Abe embarked on his economic policies of monetary easing, fiscal stimulus and structural overhaul, known as the three arrows. The Topix index soared +51% percent to crown Japan as the best-performing developed market. Roger: Wild financial fixes work for a short time then explode in catastrophe.

 “The sales-tax hike hit Japan before Abe’s third arrow could emerge, and the economy completely stalled,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo, which oversees about $857 million. “It hasn’t been a market where foreigners had reasons to aggressively buy stocks, and it’s difficult to paint a strong growth story from this point onwards as well.”

With overseas demand for shares drying-up, domestic policy changes are filling the gap with state and pension-fund cash. The Government Pension Investment Fund, the world’s largest manager of retirement savings with 130.9 trillion Yen in assets, pledged on October 31 to more than double its target allocation for domestic shares. At the time, that implied buying another 9.8 trillion Yen of Japanese stocks, according to calculations by Bloomberg. The same day, the Bank of Japan unveiled an expansion of its asset-purchasing program, including tripling investments in exchange-traded funds to 3 trillion Yen a year. While the Topix soared +4.3% on October 31, the rally was short-lived compared with gains spurred by the round of BOJ easing in April 2013.

“The gauge climbed +13 percent from the last day of October through a December peak, adding 62 trillion Yen in value. Last year, it surged +26% from the announcement on April 4 through a May high, which made investors 92 trillion Yen richer. Average daily trading volume on the Topix was -40% lower this time.

“It’s the foreigners who pull Japanese stocks up,” said Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan in Tokyo, which oversees about $3.1 billion. “If we start off next year with modest gains, foreign investors might come back. But it won’t be as extreme as when Abenomics first began.” Trust banks bought 972 billion Yen in shares from October 27 through the most recent data on December 19, while foreign investors added 2 trillion Yen. Individuals sold 2.7 trillion Yen during that period, as the Topix gained +12%.

Foreigners are “momentum jockeys” who tend to follow the trend, while individuals usually do the opposite, buying when the market is weak, said Jonathan Allum, a London-based strategist at SMBC Nikko Capital Markets Ltd. “The interesting group are the trust banks, who seem to be on something of a buying spree, which I expect to continue into the new year.”

Fund flows from the central bank and GPIF underpin Morgan Stanley MUFG Securities Co.’s forecast for the Topix to climb to 1,680 by the end of 2015, an +18% jump from the last close. A lower currency will buoy earnings and return on equity is improving, according to the brokerage. The median projection of 10 analysts and investors surveyed by Bloomberg is for the Topix to gain +16% to 1,650.

Companies have been slow to adjust earnings forecasts to the weakening Yen, which has declined -13% this year against the greenback and touched a seven-year low December8. Japanese businesses expect the currency at 103.88 per dollar in the fiscal year ending March, the BOJ’s quarterly Tankan survey showed this month, despite the yen trading at an average level of 118.24 during the period the survey was conducted.

“Companies that haven’t already revised their earnings forecasts will probably do so by the end of this fiscal year,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc. “With Yen weakness expected to continue next year, businesses with overseas demand will provide a tailwind for the market.”

Aggregate net income will rise +16% to a record 21.4 trillion Yen this fiscal year at 219 of the country’s largest firms, based on analyst estimates compiled by Bloomberg. After winning a second term from voters earlier this month, Abe’s initial focus in 2015 will be a fiscal-stimulus package and lower corporate taxes.

The government approved 3.5 trillion Yen of extra spending to aid the economy over the weekend, including shopping vouchers, subsidized heating fuel for the poor and low interest loans for small businesses hurt by rising input costs. A panel will submit a draft plan for a company tax cut of “slightly more than” 2.5 percentage points for the next fiscal year, NHK reported December 26. Roger: This is the Japanese version of crowd control on the streets.

Investors are also waiting for a loosening of labor rules, agreement on the Trans-Pacific Partnership trade pact and for companies to buy into Abenomics by raising wages and spending record cash hoards on business investment. Roger: This is the latest Gee Whiz idea from the White House that may in fact have some merit. It must be helpful as the Democrats are going against the president on the initial go-around. “If an eye-opening growth strategy was proposed, foreigners might come back and start buying again,” Sumitomo Mitsui Trust’s Sera said. “But if we haven’t seen one by now, there’s almost no chance we ever will.”-Yuji Nakamura & Yuko Takeo Tokyo12-28-14 Bloomberg.net

As we have written so many times before the race to a crash bottom is among China, Japan, Europe and Russia. The big question is this: Who’s bond markets hit the failure switch first and find themselves in a rolling cascade of default? China can last longer manipulating numbers with ease in their communist-capitalist hybrid economy.  Europe is so large by comparison with Japan they can probably end up being second worst. Then, it appears Japan is the leading candiate after The Russian Ruble and bond collapse to circle the drain. Putin has supreme power while Japan is more democratic. Looks like Abenomics is the first victim of our long predicted central banker bond collapse. I wish them well particularly as I have family in Tokyo.

I want to make it clear on a very important point for our readers, traders and investors: What we are seeing from 2015 to 2018 is long needed economic cleansing of currencies, bonds, politics and other assets. The shake-out could be violent and scary particularly with new job promoting wars coming. However, it is my considered opinion this is not end of the world stuff. Every 70 years or so a massive house cleaning is required. This began in 1999-2000 with the failing Nasdaq. The overall messy drop is still in play. The ending is in sight and the world survives as will the America. All will be pleasantly surprised at the later vast improvements.  America is not dead and neither is the U.S. Dollar. We are still taking a real beating as that is the price we have to pay to rid ourselves of all these negative economic and political problems. Mr. Market hits the lever and they are being flushed into a place where they belong.  –Roger