Global Macro Outlook December 2017

Rising Sun: A Secular Upturn in the Japanese Economy

  • In the previous edition of the WFYI Global Macro Outlook, we looked at some interesting opportunities in the market for Electric Vehicles. Driven by the impending demand for EVs and corresponding shortages of supply, in 2017 alone, cobalt spot prices have skyrocketed 80% and nickel is also up 28%. We believe this trend is likely to persist into 2018, as demand for such vehicles continues to grow, and supply bottlenecks (for example, in the DRC) continue to persist.

 

  • This month, we turn our attention to one of the more interesting themes arising in the G7 economies: that is, what appears to be a strong secular recovery in the Japanese economy. It appears that, for the first time in many years, the macro and micro environments seem to be supportive of robust Japanese growth. As seen in the chart to the right, Japanese GDP growth rate has increased on a Q-o-Q basis for the last 7 quarters. This, we believe is driven by relatively ideal conditions arising in Japanese demographics, the labour market, as well as meaningful gains in productivity.

 

  • The first macro trend that is supportive of this Japanese recovery is that demographics within the economy appear to be in a sweet spot. Japanese labour has been in relatively short supply for a long time, which has created the conditions for improving wages as well as employment conditions. As of November 2017, starting salaries for Japanese graduates were up 6.00%, and 98% of graduates were able to find a job offer within 10 days of looking for one. This, we believe are indicators of robustness in the Japanese labour market.
  • Further supporting this secular recovery is the growth in Japanese productivity from a multitude of factors. Supported in part by the political environment by Shinzo Abe, Japanese companies have in recent years been more supportive of hiring women workers, as well as being more open to immigration. This has in turn created the environment for growing Japanese productivity, which outstrips the productivity growth that we are seeing in other developed markets. In conjunction with strong impetus for growing wages in Japan, and ideal labour market conditions, we believe there is good reason to be bullish on Japanese stocks.

 

  • Beyond the fundamentals of the thesis, let us then further explore the technicals of the situation. Referring to the chart of the Nikkei 225 on the left, we see that in the recent months the Japanese Stock Index has benefited strongly from a year-long rally that has taken out key resistance levels. The index is up more than 20% since the beginning of September, overtaking the highs of 2015, 2007, and even the mid-1990s.

 

  • There remains the basic question of whether this rally in the Japanese market is in any way justified. Based on the relatively supportive macro environment (loose monetary and fiscal policy), fundamental drivers in the corporate environment (growing productivity and ideal demographics), we believe that there is a strong fundamental basis for this move. Therefore, in the next 3-6 months, we will anticipate pullbacks in this rally up to the 2,100 key support level, before considering taking up a long-term bullish position.

By Nicholas Tan Wei Hong