The Strange Case of Bunji Button

[Gulliver]

Discussion point:
Japan has fallen into recession and yet the stock market has achieved record highs. How do you reconcile this discrepancy?

[RetireJapan]

The stock market is not the economy.

Thank you for coming to my TED talk.

[Gulliver]

The stock market is not the economy.

Thank you for coming to my TED talk.

I’m fairly certain we’re all aware that stock markets can increase in value during a recession. Anything more insightful?

[sutebayashi]

I saw some data on the tv this week that was saying that in recent times individual investors have been net sellers of Japanese equities, selling 10s of trillions worth of Japanese shares.

The BOJ on the other side has been a big buyer, I think the number I saw was 35 or so trillion yen’s worth.

Then there was domestic financial institutions buying some, and also lots of buying by foreigners, maybe it was circa 20 trillion worth.

I tend to suspect the foreigners will flip off their positions before their fiscal year is out - the Jan and Feb have been a great year for Japanese equities, would be a shame if anything happened to those unrealized profits!

[Deep Blue]

The stock market is not the economy.

Thank you for coming to my TED talk.

This is it, in a nutshell. Listed Japanese company revenues and profits are closely correlated with global GDP growth, not Japanese GDP.

Look at the top ten listed companies by market cap - I will probably get this a bit wrong but it is something like Toyota, Sony, Keyence, Tokyo Electron, M-UFJ, Softbank, NTT, Honda, Hoya and Shinetsu Chemical. With the exception of NTT and M-UFJ, they all derive a majority of profits from outside Japan. Even M-UFJ has 30% of it's business outside of Japan thanks to Morgan Stanley and other investments.

The weak yen has helped a lot, and the twin themes of gen-AI and Chinese lagging node SPE investment have been huge boosters for SPE related names. When you throw in corporate governance reform and capital allocation improvement it helps explain why the stock market has done so well. Remember Japanese companies in aggregrate still have the strongest balance sheets in the world - they are massively over-capitalised and the encouragement to hike dividends and reduce net cash postions with buybacks is having a positive effect.

[Deep Blue]

The BOJ on the other side has been a big buyer, I think the number I saw was 35 or so trillion yen’s worth.

Not for a while now. Under Kuroda the BoJ adopted an (insane) policy of buying Nikkei and Topix ETFs in the afternoon every time the market closed down 1% in the morning session. This was (IMHO) completely pointless but the net result is the BoJ now owns something like 7% of every listed Japanese equity. The good news is this policy seems to have been shelved for a few quarters now but the bad news is the BoJ doesn't seem to have an exit strategy.

However, the buying didn't seem to support the market when it happened, so hopefully it won't tank the market when it is unwound. It was an incredibly stupid policy from the hapless Kuroda though, in my view.

[Yutaka2024]

Question is; if japan raises interest rates in the future; what would the outcome be.

[RetireJapan]

Not for a while now. Under Kuroda the BoJ adopted an (insane) policy of buying Nikkei and Topix ETFs in the afternoon every time the market closed down 1% in the morning session. This was (IMHO) completely pointless but the net result is the BoJ now owns something like 7% of every listed Japanese equity. The good news is this policy seems to have been shelved for a few quarters now but the bad news is the BoJ doesn't seem to have an exit strategy.

However, the buying didn't seem to support the market when it happened, so hopefully it won't tank the market when it is unwound. It was an incredibly stupid policy from the hapless Kuroda though, in my view.

I'm guessing they have made a large profit though? Maybe the government can use it to pay down debt or something.

[Deep Blue]

They have a big unrealized profit on their equity purchases, but this is dwarfed by the far larger unrealized losses they’ve made buying JGBs at much higher prices than they now trade at.