Japan’s PMI and equities

This Great Graphic was posted by Cullen Roche of Pragmatic Capitalism.  The July PMI was disappointing and follows poor industrial production figures at the start of the week.   This coupled with a decline in Prime Minister’s Abe’s poll numbers is spurring talk that the best of Abenomics can now be seen in the rear view mirror.

Some observers may point to the victory in the upper house election a couple weeks ago, but we are more inclined to see it as the demise of the DPJ rather than a stunning victory of the LDP.

Japanese stocks (Topix) fell on Wednesday  to cap the third consecutive losing month   It is still up 31.5% for the year.  Many international fund managers are still under-weight relative to benchmarks and continue to buy Japanese shares.  The 4-week average of foreign purchases of Japanese equities (based on MOF data) is near JPY428 bln.  This average peaked in April near JPY765 bln.   New data will be reported in early Tokyo on Aug 1.

Some fund manager see value in Japanese shares.  The Topix, for example, trades at 1.21 times book value.  A similar ratio for the S&P 500 is near 2.48 and Dow Jones Stoxx 600 (Europe) is near 1.7.

Separately, we have suggested that small cap Japanese shares may continue to outperform the larger cap.  Over the past month, the JASDAQ has performed slightly better than the Nikkei (-1.3%) and the Topix (-1.7%).   However, over the three month declining streak, it has under-performed (-2.75% vs -0.95% and -2.3% for the Nikkei and Topix respectively).  Year-to-day the JASDAQ is up 62.1%.

Turning to the dollar-yen rate, we have been somewhat less bullish the dollar than the consensus partly on ideas that Abenomics was being priced in prior to it being implemented.  We have also suggested that the US and world’s tolerance of a weaker yen has limits and we expect a push back in the coming months.  We have the dollar finishing Q3 near JPY97.