Wealthy Nations Daily Update - Japan

Japan is a wealthy nation, although as we all know the government balance sheet has suffered over the last 20 years. However, the savings held by the nation easily offsets the government deficit and results in Japan Inc. having a Net Foreign Asset score of 62% of GDP which equates to a six star rating. The problem we have is that Japanese names trade expensive relative to other credits and it is very difficult to obtain paper over and above ‘fair value’ due to the demand of savers.

Yesterday’s revision of third quarter GDP from -0.8%, the preliminary estimate, to 1% means that Japan has managed to narrowly miss a technical recession - defined as two consecutive quarters of negative growth - as initially announced.

This is a big boost to Prime Minister Shinzo Abe who has made reviving the economy a priority. Abe-san last month ordered a further budget for this current fiscal year to be compiled; which is thought to be in the region of $28.4bn. Also the current account surplus for October was announced at JPY1.46tn, (~$11.9bn) the 16th straight month of surplus.

These positives have encouraged some prestigious houses, namely JP Morgan and Morgan Stanley, to make an “out of consensus” forecast that the Japanese yen will outperform all their peers next year.

The yen is down around 40% over the last four years against the US dollar but next year both houses look for the yen to appreciate against all ten of the largest traded currencies in the market. If you like the idea of long yen, maybe wait to see if the BoJ eases further this month or next as this is not expected by the market and could offer a much better entry point.