Sharply Weaker Yen Boosting Japanese Stocks

The Japanese yen has lost 11% against USD from lows this year, and is also rapidly depreciating against the Euro, Australian Dollar, New Zealand Dollar and Pound Sterling--all popular currencies for the heavily leaveraged currency trader housewives of Japan.

The yen against the US dollar is now bumping up against psychologically important JPY100/USD resistance, and since it has climbed up above its 13-week and 26-week MA, looks headed for JPY110/USD, which was a popular target among the JPY bears.

Horrendous trade numbers (i.e., a virtual halving of exports in February), talk by the Aso Administration of significant additional economic stimulus that has bond investors worrying how this will hurt JGBs, and the end of seasonal repatriation has given the supply-demand green light for yen weakness. While domestic GDP forecasts are still woefully sanguine, the IMF, World Bank and the OECD have slashed Japan's GDP forecast to -5%~-6% plus for 2009.

Ironically, however, the yen's weakness will produce some nice windfall profits for the very same exporters (i.e., automobile, electronic equipment and precision equipment manufacturers) that are getting pounded because of imploding export growth. It is important to note that the stock prices of such companies discount currency movements real time, even though it may take six months or more to actually see the forex windfall profits in these companies' earnings. These stocks will probably continue to rally--and could see a noticeable uptick from here--as JPY trades through JPY100/USD on its way to JPY110/USD--a exchange rate at which Japanese exports are solidly profitable--and versus forecasts as indicated in the recent BOJ TANKAN survey of business sentiment of JPY97~JPY98/USD.

Dare we hope for a recovery in the Nikkei 225 to 12,000, from which Japanese stock prices really fell out of bed?

20 TSE-Listed Companies Face Delisting Because of Insufficient Market Cap

Japan's Nikkei 225 has fallen 61.8% from a high of 18,300.39 in February 2007 to a low of 6,994.90 in October 2008. In the process, the market capitalization of the Tokyo Stock Exchange's (TSE's) first, second and Mothers markets has imploded by JPY311.29 trillion ($3.2 trillion), to JPY266.8 trillion from a peak of JPY578.09 trillion in June 2007. The price-to-book ratio for all companies listed on the TSE 1 has continued to trend under 1.0X, and is still at 0.93 even after the recent rally, while the P/E multiple for the entire first section has soared from a mere 10.6X trailing earnings to a massive 111.9X forward earnings, and the earnings yield has imploded from 9.41% trailing to 0.89% forward earnings. In Q4 alone, the Nikkei estimated that the entire exchange-listed manufacturing sector was losing a massive JPY4 trillion ($41 billion) at the recurring profit level.


The Tokyo Stock Exchange said Wednesday that 20 of its listed companies were short of minimum market capitalizations required for listing as of Tuesday or the end of fiscal 2008, up from three a year earlier, despite eased requirements in the face of falling stock prices. The 20 companies -- Hoosiers Corp. listed on the First Section, eight firms on the Second Section and 11 on the Mothers market for start-ups -- will be de-listed if they fail to bring their market capitalizations back to the required levels during a nine-month grace period, the TSE said.

As an emergency step to deal with the recent plunges in stock prices, the Tokyo exchange has lowered the minimum amounts of required market capitalization, such as from JPY1 billion to JPY600 million yen for companies on the First Section since January. As of Tuesday, 1,719 companies were listed on the First Section, 457 on the Second Section and 194 on the Mothers market.

Nikkei 225 Resilient Amidst Very Bleak Economic News

What would you expect the Japanese stock market to do on a day when;

a) The Nikkei newspaper was reporting that the World Bank and OECD had slashed their forecasts for global 2009 GDP growth, and Japan's GDP to minus 5.3% and 6.6% respectively, and world trade growth was slashed minus 6%-plus. This after the IMF a couple of days earlier had slashed Japan's GDP growth to minus 5.8% in 2009.

b) The Bank of Japan announced the worst Tankan in 30 years with a reading of minus 58/59 that was worse than already bearish street estimates.

c) A new estimate put Japan's national debt at 197% of GDP, up from around 172% of GDP in 2008.

If you said, "it would fall", you would have been wrong. The Nikkei 225 had already given up 530 points in three days. Moreover, the Yen slipped to JPY98/USD during the session. Consequently, the Nikkei 225 gained over 242 points and closed at 8,351.92.

The Nikkei 225 has pulled ahead of its 13-week MA for the first time since April 2008 and has also breached its 26-week MA; and is looking like it's trying to form a "golden cross", where the 13-week moves above the 26-week, which is usually the sign that an interim rally has begun.

Oil refiners like Cosmo Oil (5001.T) have already seen a golden cross in their 13-week and 26-week MAs, while non-ferrous stocks like copper and gold producer Sumitomo Metal Mining (5713) are basing nicely, and even auto stocks like Honda (7267.T) are also seeing a turn in their moving averages on foreign buying.

However, a golden cross in the 13-week and 26-week MAs is not an iron-clad guarantee of a sustainable rally. In Q2 2008, the Nikkei 225 pulled up enough to generate a golden cross in its 13-week and 26-week MAs around 14,000~13,000--only to see the index plunge 50% to a new low below 7,000. We would probably need to see the Nikkei 225 rebound back above 10,000 and hold against any sell-off before we could confirm there will be no breakdown through prior lows.

Today's market action however does indicate that investors in the Nikkei 225 have already discounted quite a bit of the horrendously bad news (i.e., they are getting enured to the bad news)--and are looking to see if there are any silver linings. After all, the Nikkei 225 has already fallen over 60% from mid-2007 highs above 18,000.

International Agencies Slash Japan Growth Forecast

Global GDP and Japan Growth Forecasts Slashed Again

Following the IMF's slashing of its Japan GDP forecast to a minus 5.8%, the World Bank and OECD have slashed their Japan GDP forecasts to minus 5.3% and minus 6.6%. This compares to domestic private sector economists' consensus of minus 4.3%, the BOJ's minus 2%, and the government's 0% forecasts--i.e., there is a major disconnect in perceptions of the seriousness of Japan's recession inside and outside Japan.

The World Bank and OECD now see global GDP growth falling by 1.7% and 2.7% respectively in 2009, total OECD group GDP growth falling 4.3% and world trade plunging as much as 6.1%. This is despite continued GDP growth of 6.5% and 4.0% for China and India, respectively. The Asian Development Bank however has slashed its forecast for developing Asia GDP growth from 5.8% to 3.4% in 2009.

Limited Room For Stimulus in Japan As Debt Ratio Climbs to 197% of GDP

Prime Minister Taro Aso has called for at least JPY10 trillion of fiscal spending for additional economic stimulus for Japan--on top of the nominal JPY75 trillion of stimulus already announced. The BOJ is now aggressively using its balance sheet to keep credit flowing, especially among SME (small and medium-sized enterprises).

However, Japan's debt-to-GDP ratio is now expected to rise to 197% of GDP in 2009, and exceed 200% in 2010--i.e., the Japanese government is severely restrained from all-out fiscal stimulus by an already heavy government debt burden.

Worse-Than-Expected March Tankan

Moreover, the March BOJ Tankan DI (diffusion index, a measure of business confidence) plunged to minus 58 versus a street (Bloomberg) consensus of minus 55, which represents a 30-year low in business confidence and compares to a minus 24 in the December survey. The forward-looking DI (for June) was minus 51 versus a prior minus 36. Hurting confidence was the forecast for JPY97/USD through FY2009, which will continue to put downward pressure on exporter profits, and of course the World Bank forecast of a 6%-plus decline in world trade

Japanese Companies Seeing a Rebound in Sales to China, India

Automobile Companies

Nissan Motor (7201.T) and Suzuki Motor (7269.T) are seeing strong sales growth in China and India. Nissan's joint venture Dongfeng Nissan Passenger Vehicle Co. is seeing brisk demand for Tiida and other subcompacts after China cut the automobile sales tax for 1.6-liter or smaller cars by half to 5% in late January. The Nissan joint venture's sales were up 51% YoY in February for the second straight month of record sales. Suzuki Motor saw its Chinese sales in February climb 19% to YoY above 18,000 units, the first time in six months. In India, Suzuki's sales recovered to 71,000 units in February for the second consecutive monthly record, and rebounding sharply from the 27% drop to 47,700 units in November. Honda (7267.T) also saw sales grow 12.5% to 5,400 units in February.

To keep pace with the recovery, Nissan increased production in China by 47.9%. At Honda, output there rose 5.7%, a record high for February. Mazda Motor (7261) production soared 48.6% to 10,000 units, the first increase in eight months.

Toyota Motor (7203.T) however is not doing so well in China. Toyota saw its Chinese sales fall 7% in February to 35,000 units, while its Indian tally dropped 10.5% to 3,000 units.Nikkei

Basic Materials

Aggressive buying from China has pushed the price of spot price of cadmium up 126% over the past two months, as China began stockpiling the metal used for batteries and pigments.

Basic materials firms are also boosting China exports. Mitsubishi Materials (5711.T) recently began exporting copper ingots to China at a pace of around 10,000 tons a month. At Pan Pacific Copper, a joint venture between Nippon Mining & Metals Co. and Mitsui Mining & Smelting (5706), copper exports to China this month will likely double from a year earlier. Japan's total copper exports to China soared 130% from a year earlier in January, lifting its total copper exports in that month by more than 70%. Tosoh(4042.T) plans to boost output of an insulation material for consumer electronics and homes as exports, which account for 70% of its production of the material, pick up, particularly to China. To meet improved demand from Chinese consumer electronics makers, Asahi Kasei(3407) has stepped up production of resin materials at a South Korean plant to almost 100% of capacity.

With various infrastructure projects kicking off as part of the stimulus package, demand for construction machinery is also on the rise. Exports of three of the four leading plastics, including polypropylene, all rose at least 80% on the year in February. Companies like Mitsui Chemicals (4183.T) are seeing an uptick in automobile production-related sales.

Construction Machinery

Major construction machinery manufacturers such as Komatsu(6301.T) are stepping up development and production of environmentally friendly equipment such as diesel-electric hybrid excavators, which save up to 25% on fuel costs. Despite being priced about 50% higher than conventional machinery, hybrid products have gained popularity. Komatsu will begin selling such products in China this spring, aiming for sales of about JPY19 billion in fiscal 2009. Introductions in other emerging markets will follow. Hitachi Construction Machinery (6305.T) is boosting production of electric excavators. Its Ibaraki Plant will boost production capacity by 40% in FY09, monthly output is expected to triple to 50 units by 2012.

Apparel Companies

Mid-sized apparel companies are also boosting their presence in China. Sanyo Shokai (8011.T) plans to increase its presence in China by boosting sales spaces in department stores and other locations from nine currently to 70 by 2011. In addition to locations in coastal regions of China, Sanyo Shokai will increase stores in interior regions such as the city of Chengdu in Sichuan Province. Link Theory Holdings (3373.T) plans to lift its presence in China by upping its fleet of stores from seven currently to 30 or so and by roughly quadrupling annual turnover to JPY1.8 billion by the year ending August 2010. The store openings will be concentrated primarily in department stores and commercial locations in major cities such as Shanghai.Honeys (2792.T) also plans to increase its stores in China to 130-150 by the end of March 2010, up from about 100 now.

Among the big apparel companies, Onward Holdings Co. (8016.T) raised its stores in China by 31 last year to bring the total number to 178 as of December. Fast Retailing (9983.T) plans to boost its store numbers, which total 25 including locations in Hong Kong, to 100 within the next five years.

Soft Drinks

Calpis (2591.T) is seeking to raise sales of lactic acid drinks in Asia as health awareness grows in the region. By this summer, the company plans to start selling a restaurant version of its namesake beverage in 1.5-liter bottles in China. The product will be the same concentrate sold in Japan.
Four subcontracted plants in Taiwan will export 5,000 to 10,000 six-bottle cases to China the first fiscal year. A household formulation of the drink already being marketed in China is exported from Japan, but the restaurant version will be shipped from Taiwan due to the strengthening yen.

Yakult Honsha (2267.T) is increasing production capacity for its namesake lactic acid drink in China by 40%. The firm will invest some 4 billion yen to expand plants in both Guangzhou and Shanghai by early April. At the Guangzhou plant, equipment with a daily capacity of 450,000 units will be installed, boosting capacity there to 1.25 million units per day. And at the Shanghai plant, a 200,000-unit-per-day production line will be added, raising daily capacity to 900,000 units.

Marubeni (8002.T) will start selling Japanese milk in China from April, hoping to capitalize on the perceived safety of the product at a time when fears are running high there about contaminated dairy goods. Costing two to three times as much as local products but perceived as being much safer, sales will initially target the large Japanese community in Shanghai. Japanese firms already have a presence in the Chinese dairy market, with a joint venture between Itochu (8001.T) and Asahi Breweries (2502.T) producing and selling milk in the country. The venture has managed to increase sales on the strength of the companies' brand power and the use of a production process designed to ensure safety.

Baby Products

Unicharm (8113.T) and Pigeon (7956.T), leading Japanese producers of baby care goods, will expand sales networks in China, particularly from coastal areas to inland regions. These companies have already established a presence in China -- where roughly 18 million babies are born annually, about 16 times more than in Japan. Unicharm is expanding its network of sales agents to 500 cities and areas this year, 300 more than in 2008. The firm has mainly targeted China's coastal areas, offering the same high-quality paper diapers marketed in Japan. Unicharm intends to raise its Chinese sales to JPY50 billion in fiscal 2011 from 20 billion yen in fiscal 2007.

Pigeon seeks to set up branches in five Chinese locations by 2011, including Beijing as well as Guangdong and Sichuan provinces. It already has a base in Shanghai.The firm intends to expand its sales network to supermarkets and drugstores in inland regions and increase sales of such products as baby bottles and nursing pads. It aims to sell its goods at 8,000 stores in fiscal 2011, up 30% from its current tally, and double sales to 10 billion yen.

New Products Specifically For Emerging Markets

Fujifilm (84901.T) and other major Japanese companies are developing goods specifically for emerging nations, a shift from a previous strategy of marketing products originally for the Japanese, then the U.S. and European markets. The target is a growing pool of middle-class consumers in emerging markets. Fujifilm will roll at a compact digital camera priced at $100 to Asian and South American markets, or half existing products in the Japanese market.
They are targeting an 80% increase in global sales of digital cameras.

Panasonic (6752.T) is expediting development of products for the BRICs nations -- Brazil, Russia, India and China -- as well as Vietnam. In fiscal 2009, it will roll out around 70 consumer and household electronics products, a 40% YoY increase.

However, Japanese steelmakers have so far been left out because China continues to suffer from an excess supply of steel.

World Economic Climate Deteriorates Further Q1 '09

According to Germany's Ifo Institute, the world economy as measured by the
IFO World Economic Climate worsened further in the first quarter of 2009. The indicator has fallen to a new historic low. The decline is solely the result of more unfavorable assessments of the current economic situation; but the expectations for the coming six months have improved somewhat.

The deterioration of the Ifo World Economic Climate has affected all major economic regions: the economic climate indicator is more unfavourable than the world average in Western Europe and Asia; in North America it corresponds to the world average; and in Latin America, Oceania, the CIS countries, Central and Eastern Europe and especially in the Near East countries the climate indicator is above the world average. The export and import expectations of the WES experts indicate a clear decline in world trade in the first half of 2009.

A further decline in central bank interest rates is expected nearly everywhere. Also long-term interest rates are expected to fall in the coming six months, according to the WES experts, albeit less than short-term interest rates.

The JPY is now seen as slightly overvalued
for the first time since 2002. On the other hand, the US dollar is largely seen as properly valued, and correspondingly, WES experts anticipate a stable dollar in the coming six months.

Japan February Auto Inventories Fall 4.2% Mo-Mo. On a 56% Slashing of Production

Bloomberg reported that Japanese car inventories fell 4.2% in February, which is the largest decrease since 1953, when the data series started. Overall factory output fell 9.4% versus a record 10.2% in January. Auto inventories are now the lowest since August 2007 after February auto production was slashed 56%, which was the fifth consecutive month of production declines.

As a result, Toyota (7203.T) expects to have adjusted inventories to levels that reflect demand by April. The carmaker, which cut global output a record 53% last month, plans to ease domestic production cuts from May. Nippon Steel Corp. last month said production should improve next quarter because customers have used up their supplies. Nissan, Japan’s third-largest automaker, says it will also raise domestic output next month. After being quick to get their arms around excess inventories, they are starting to move production back more into line with demand. Demand however is still depressed, albeit stronger than the January-February period.

Stock prices however were sold off on Monday as investors sold on the news that the Obama Administration rejected the turnaround plans submitted by General Motors and Chrysler, which raises the possibility of an industry disruptive bankruptcy of these firms. An uptick in the yen to the JPY96/USD level also was a negative. The auto stocks however were not among the top 50 declining stocks for the session.