Friday, January 28, 2011

Japan: Deflation + Downgrades = Good Stock Market

S&P downgraded Japan's credit rating yesterday citing, among other factors, the fact that Japan's ratio of government debt to gross domestic product is now above 100% (and rising).

The downgrade is somewhat symbolic, it would seem, since most of Japan's deficits are financed by domestic savings (unlike other countries, like the U.S., which rely on the kindness of strangers to finance their profligate ways). The S&P action sent a shiver through the credit markets.

Deflationary pressures, meanwhile, show no sign of abating, despite the government trying everything in the Keynesian playbook to try to get prices moving higher. Japanese 10 year government bonds offer a whopping 1.2% yield.

The employment outlook for younger Japanese is depressing, to say the least. Older Japanese workers - whose pensions and savings have been decimated over the last 20 years - have been reluctant to retire, and opportunities for college graduates are limited.

This morning's New York Times carried a long piece about the difficult employment outlook for even the most talented Japanese students:

Last year, 45 percent of those ages 15 to 24 in the work force held irregular {temporary} jobs, up from 17.2 percent in 1988 and as much as twice the rate among workers in older age groups, who cling tenaciously to the old ways. Japan’s news media are now filled with grim accounts of how university seniors face a second “ice age” in the job market, with just 56.7 percent receiving job offers before graduation as of October 2010 — an all-time low.

“Japan has the worst generational inequality in the world,” said Manabu Shimasawa, a professor of social policy at Akita University who has written extensively on such inequalities. “Japan has lost its vitality because the older generations don’t step aside, allowing the young generations a chance to take new challenges and grow.”

So what does the Japanese stock market think of all of this?

A savvy client sent me this piece yesterday from Reuters:

Nomura's new Japan stocks fund draws strong demand
TOKYO Jan 27 (Reuters) - A new Nomura Asset Management mutual fund that invests in undervalued Japanese equities has attracted $887 million worth of retail money, an official from the fund's distributor Nomura Securities (8604.T) said on Thursday...

That was more than double the amount of last year's top newly launched fund, which was offered by Daiwa Asset Management and totalled 34.5 billion yen, data from fund research company Lipper showed.

"The stock market is expected to be in an upward trend for a while and there were many investors wanting to benefit from that," the official at Nomura Securities said....

...Japan's Nikkei benchmark average .N225 has jumped about 10 percent over the last three months, outperforming a 7.7 percent rise for the Dow Jones industrial average .DJI and a 2.2 percent rise for Hong Kong Hang Seng Index .HSI, Thomson Reuters data shows.

It is almost axiomatic that economic data and stock market performance do not mirror each other, and Japan seems to be the latest example.