Do you remember Abenomics?

Most probably you don’t and rightly so because we have only observed Kurodanomics and a half-broken arrow. We haven’t even seen a glimpse of the most important third one.

Is it another failed attempt to reboot Japanese economy? No, it wasn’t. Because it wasn’t planned to reboot. Third arrow didn’t exist. From the very start his intention was to go back to pre-Apple, pre-Windows, pre-PC days. Good old days of Sony Walkman and Toyota 2000GT. Bigger-than-already-big government and beurocrats exercise tight control over corporate sector. Evolution was not in his mind. Renaissance was. Economy had been falling off the cliff under the previous government. Anti-clock policy move was surely better than death.

Three years ago BOJ was forced to QE and public spending was U-turned to expand to reflate the economy. Fine as long as this was coupled with meaningful attempt to change structure, to deregulate, to keep up with the dynamic world. Structural changes generally bring pains so it makes sense to ease the pain before gain appears. But what we have seen countless times in the past 20+ years were to abort as soon as pains start to lose votes. Maybe this PM was smarter than previous PMs. He either learnt from the past or had traders’ instincts. Why seek pains? Just go for quick gains. Forget the long-term consquences. Someone else will later deal with it. That way everyone will be happy for the time being and happiness will buy a lot of votes. He should be in Wall St. But what is the price?

I always thought Japanese economy would neither fly nor die. Debt level is diabolical and future cost of social security is astronomical. Yet the authority will try to avoid default through consumption tax hike to 30-40% and 50-75% cut in pension payout. Anywhere else in the world this will lead to revolution. But people here rather share known pains than face unknown changes. This way what we will probably get is very slow death. Is this still the case? Can we really avoid sudden death? If we extrapolate what we have seen so far for another few years, I am not so confident any more. Perhaps sudden death is a necessity to carry out a change therefore it shouldn’t be avoided.

Will the Japanese market rebound?

If it break through the technical resistance level at 16,744, Nikkei 225 has every chance to continue to regain the lost ground towards 17,900, the recent peak in February.

External pressure on Tokyo is subsiding as the US market appears to have settled down during the recent weeks. Macro economic environment in the US remains healthy and there is little chance that the recovery will stall anytime soon. The Fed is likely to wait for more evidence.

The risk remains in the direction of the currency. It is harder to justify intervening, even if it is merely verbal, if the authorities in Japan follow the spirits of G20 statements. Cheap Yen has already drawn criticisms by several US presidential candidates. Trade surplus is on the rise. It is hard to find reasons why Yen should not spike further from this level towards 110, or even 100. Yen remains 10 ~ 15% undervalued.

Macro economic environment in Japan is dull and there is no sign of a change. The government might try to support the economy through fiscal packages or by delaying consumption tax-hike. There are clear incentives ahead of autumn election. But they are unlikely to boost the economy significantly without currency depreciation. Japan cannot export its way out anymore. Earnings growth will come to a halt.

It appears corporate earnings already peaked in previous quarter. Falling profits provide little valuation support at this level. In a few months time profit forecasts for fiscal year 2017 will start to come in and potentially further depress market sentiment.

Overall this market can enjoy a sweet spot for the time being through March but beyond that risks are clearly on the downside. Target for Nikkei 13,000 before summer.