To The Moon

As of July 9, the Nikkei 225 Index and TOPIX Stock Price Index Futures (TOPIX) hit record highs of 41,769.35 points and 2,907.21 points respectively. The resumption of the Japanese stock market's rise is basically consistent with the cycle of the resumption of the yen's decline against the US dollar, which means that the depreciation of the yen not only reflects the weakness of the Japanese economy, but also reflects the favor of international capital against the Japanese stock market, and shows that the decline of domestic performance of Japanese companies caused by the slowdown of the Japanese economy is not enough to reverse the momentum of overseas profit growth of Japanese companies.

It is rare in history that this round of Japanese stock market record high deviates from Japan's economic growth. It appears in a specific macro environment, that is, the continuous depreciation of the Japanese yen stimulates exports, the growth of Japanese overseas investment and investors' large-scale leveraged transactions under monetary easing.

Economic Growth Fundamentals Deviate from Japanese Stock Market Trends

According to the revised data released by the Cabinet Office of Japan, due to weak domestic demand, after seasonal adjustment, Japan's real GDP fell by 0.7% month-on-month in the first quarter, which was 0.2 percentage points higher than the initial value.

On an annual basis, Japan's GDP in the first quarter fell by 2.9% month-on-month. Among them, government public investment was reduced from a month-on-month increase of 3.0% to a decrease of 1.9%; Residential investment was lowered to a decrease of 2.9% from a decrease of 2.5% month-on-month; Japan's economic growth is mainly driven by personal consumption. However, in the first quarter of this year, the contribution rate of personal consumption growth to GDP growth has been declining, and enterprises have insufficient confidence in equipment investment.

Against the background of the depreciation of the yen, the high price level in Japan has offset the benefits of the nominal growth of Japanese residents' income, resulting in a year-on-year decline in the actual disposable income of Japanese residents. Japan's largest trade union organization announced the results of its 2024 wage negotiations on July 3. This year, the average wage of its members increased by 5.1%, the highest level in more than 30 years.

However, data from Japan's Ministry of Health, Labour and Welfare show that after deducting rising prices, Japan's real wage income in April has decreased year-on-year for 25 consecutive months. The decrease in the real income of Japanese residents affects the purchasing power of Japanese residents. Data show that in May, the monthly consumption expenditure of Japanese households with two or more people actually decreased by 1.8% year-on-year and 0.3% month-on-month.

The only benefit of the depreciation of the yen to the Japanese economy is that it will bring prosperity to the tourism industry, but the sector led by the Japanese stock market is not the tourism industry, but the semiconductor sector. Data show that in the first quarter of 2024, the consumption of tourists visiting Japan converted into annual data has reached the 7 trillion yen mark, which is about 7.2 trillion yen, and its contribution to Japan's GDP is second only to automobile exports.

The yen's depreciation against the dollar has a boost to Japanese stocks

This round of depreciation of the yen against the US dollar is not only due to the Federal Reserve's delay in interest rate cuts, which leads to the continued high interest rate spread between the United States and Japan, but also due to some long-standing structural problems in the Japanese economy:

First, Japan's important resources such as energy, food and raw materials are heavily dependent on imports, and the demand for the US dollar continues to increase; Secondly, Japan's trade in goods and services continues to run in deficit; Thirdly, although the overseas investment income is rich, the return funds tend to decrease.

From the perspective of monetary policy, although the Bank of Japan has adjusted the negative interest rate to zero interest rate in March this year, the overall market yield is still low, and the Federal Reserve does not have enough confidence in the sustainability of the decline in inflation.

The interest rate cut has been repeatedly delayed, and the interest rate differential between the United States and Japan has been at a high level for a long time, resulting in the continued depreciation of the yen against the US dollar. Data show that as of July 8, although the spread between 10-year U.S. bonds and Japanese bonds fell back to 3.19 percentage points, it was still a historical high. Statistics show that the exchange rate of the US dollar against the Japanese yen shows a positive correlation of 0.6 with the spread of 10-year US-Japan bonds, which means that the spread between the US and Japan remains high, and the depreciation trend of the Japanese yen is difficult to reverse.

The picture shows the comparison between the exchange rate of the US dollar against the Japanese yen and the spread of the 10-year US-Japan bond

Pictures

Japanese stocks rise not driven by corporate profits

Behind the good rise of Japan's stock market, the support of economic fundamentals is insufficient, which means that the domestic profits of Japanese enterprises are declining, and only some foreign investment enterprises' profits have benefited from the United States or other economies and improved. Therefore, it is concluded that the rise of Japan's stock market is not driven by corporate profits.

From the perspective of trade surplus, the current account surplus indicates the realization of Japan's overseas earnings. Affected by the increase in overseas securities investment income and the depreciation of the yen, Japan's overseas investment income expanded to 4.21 trillion yen in May. However, due to the decline in the export competitiveness of Japan's manufacturing industry, the export of goods still maintains a large deficit. In May, Japan's trade deficit in goods was 1.11 trillion yen.

To sum up, the rise of the Japanese stock market deviates from the fundamentals of the Japanese economic slowdown, which also shows that it is not driven by the improvement of corporate profits. Therefore, it can be inferred that the Japanese stock market is liquidity-driven.

The liquidity drive comes from two aspects: First, Japanese residents increase leverage, which is reflected in the continuous easing of Japan's monetary policy and the relatively slow process of rate hike; On the other hand, international capital did not flow out due to the depreciation of the yen. Instead, it used the ultra-low yen interest rate to carry out interest rates and bought the Japanese stock market on a large scale. However, the sustainability and risk of this stock market rise have increased, and there is a risk of bubble bursting. Investors can pay attention to CME group's Orient Securities Stock Price Index Futures (TOPIX) for risk management. The TOPIX futures contract is another tool for global investors to invest in the benchmark Japanese stock index. TOPIX is an indicator that reflects the current market capitalization and is used as a benchmark for investing in the Japanese stock market.

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