The future does not seem so bright for Japan when looking at fundamentals. The level of debt is astonishing (€8.6 billion debt at 0% interest rate) and the population is ageing. The debt now represents 250% of the GDP.
Inflation is still very weak and Japan's policymakers have been unable to spur it. Yet, growth has increased 1.7% in Q1 and retail sales have also increased 0.5%. The data since the start of the year has clearly outperformed expectations. However today’s data such as machine orders (-0.7 y/y) or industrial production (-1.9%) are clearly on the soft side.
What really matters is that the Bank of Japan is continuing its QE. The amount of debt it owns is not reimbursable. Social security spending is growing as the population is getting older. We believe this is actually very costly for Japan. The central bank must also keep its credibly and not default. At the moment, there is no reason for less QE as it would certainly uncover all Japan’s difficulties.
In the short-term, we bet on renewed demand for the yen as it seems likely the US economy, which we also believe is overestimated, will drive investors towards the land of the rising sun. When looking for an example, towards the S&P direction, if we remove big blue chips such as Amazon, Apple or Alphabet, the S&P is actually down.
We are certainly at an inflexion point. We reload our long USD/JPY towards 115.00 with a two-month horizon.
By Yann Quelenn