March 27, 2014

Doug Kass talks on Japan Nikkei

The Nikkei (Japanese market) is among the worst-performing indexes in the world in 2014.

The market is either losing patience with Haruhiko Kuroda, the governor of the Bank of Japan, or saying that the country's structural issues will deny success to an aggressive monetary policy.

For now, I remain on the sidelines on the topic.

The Nikkei's poor performance, as described in my "15 Surprises for 2014," has not been expected, and the bullish hedge fund community has been dead wrong.

The bulls suggest that the recent dive in Japanese stocks is simply a correction within a bull market. For the last nine months (incorporating 2014's weak performance), the Topix is flat, similar to the U.S. stock market's flat performance from May 2011 to November 2012. The Topix is now 10% below its May 22, 2013, high.

The next key data point is April 30, when there will be not only a Bank of Japan policy meeting but also the release of the central bank's twice-a-year outlook report. If the Bank of Japan fails to awaken investor risk appetite into and after the April 30 meeting/outlook report, I suspect that many will revisit their bullish views.

At this time, the Bank of Japan doesn't necessarily have to announce another big stimulus -- rather it has to show its resolve and must convince the market that it will do whatever it takes (i.e., to print as much money as necessary to lift financial conditions, confidence and asset prices).

Separately, Kuroda gave an encouraging speech on Tuesday night. Below are some major points that he made:

"We are only halfway there" in meeting the 2% inflation target. He conveyed strong resolve that QE won't stop until the inflation target is met.
The consumption tax hike will not have nearly the negative impact on the economy that the 1997 sales tax increase had. The economy in 1997 was "affected substantially by a series of failures of Japanese major financial institutions and by the Asian currency crisis that took place just when the economy showed nascent recovery." By contrast, today the banking system is healthy.

Policy will be adjusted as needed to meet the inflation target (i.e., more monetary stimulus to come, if inflation fails to keep rising to the 2% target).
In the Q&A, Kuroda commented on the yen, saying that last year the yen "didn't correct perfectly, completely."

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