A controversial report on Japan
Comment of the Day

October 08 2013

Commentary by David Fuller

A controversial report on Japan

Here is the opening of this bold forecast by Goldman Sachs
Japanese stocks will extend a world-beating rally as surging corporate earnings result in higher wages, supporting shares that benefit from domestic spending, according to Goldman Sachs Group Inc.

The Topix index will climb to 1,250 in three months, an 8.7 percent gain from yesterday's close, said Kathy Matsui, chief Japan strategist at the New York-based bank. She expects the gauge to reach 1,300 in six months and 1,400 in a year -- a level unseen since June 2008 -- as Prime Minister Shinzo Abe's policies spur inflation, putting pressure on companies to boost dividends and salaries.

"The next big catalyst for reflation is when profit growth translates into higher incomes," Matsui said in an interview in Tokyo on Oct. 7. "We have to wait a little while as wages won't rise overnight. But at the end of the day, one of the key transmission mechanisms of reflation to households is via higher incomes."

Abe's efforts to reignite growth through monetary easing and fiscal stimulus have mostly benefited investors and large manufacturers as the yen weakened, boosting overseas profits and driving the biggest stock-market rally in four decades. Getting businesses to start distributing their swelling earnings and near-record cash through higher wages will be key to sustaining a rebound in the world's third-largest economy.

Regular salaries excluding overtime and bonuses fell 0.4 percent in August from a year earlier, a 15th straight drop, government data showed on Oct. 1.

The Topix surged 34 percent this year through yesterday, handing investors the biggest gain among 24 developed markets tracked by Bloomberg. The gauge added 5.3 percent in the three months through September, bringing its four-quarter gain to 62 percent, the steepest rally since the period ended March 1973.

Earnings per share at Topix member firms will increase 35 percent in the next year, estimates compiled by Bloomberg show.

David Fuller's view This is easily one of the most bullish forecasts for Japan that I have seen, although Fullermoney has been very bullish since it became clear that Shinzo Abe would be elected Prime Minister and reflate aggressively.

(See Eoin's review: Three prime ministers in as many years has shaken confidence, 15 November 2012 - and my own assessment: I think we could be at the beginning of Japan's third seminal change since the 1960s, 31 January 2013)

The target forecasts made by Kathy Matsui in the second paragraph above are guesswork, although when basically right, Goldman Sachs is more capable of generating a self-fulfilling trend prophecy than most firms. However, I agree with her overall views so it is more important for me to point out some of the risks that could limit Japan's recovery: a surge in JGB yields; uncompetitive energy prices; a serious increase in tensions with China.

1) The government will need to avoid a significant spike above 2% in 10-year JGB yields before the economy has developed a strong recovery; 2) Japan will need to lower its energy costs to a more competitive level; 3) although Japan is less likely to be the aggressor, it will need to avoid a serious conflict with China.

Meanwhile, Japan's Nikkei (weekly & daily) needs a sustained move back above 15000 to reaffirm that the current trading range is a lengthy consolidation in its latter stages. Watch for the Topix 2nd Section Index (weekly & daily) to lead this move with a sustained break above 3450

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