Japan's Q2 Recovery Already Discounted

Japan's fiscal Q1 (April~June) GDP grew for the first time in five quarters. Real GDP 0.9% for the quarter and 3.7% annualized, but was slightly worse than the 1.0% Q-on-Q and 3.9% annualized seen by the street consensus. External demand (net exports) boosted growth by 1.9 percentage points as sharp declines in Q4 calendar 2008 and Q1 calendar 2009 waned, producing Q-on-Q growth, and private spending rose 0.8%, boosted by the government's stimulus package worth JPY15 real fiscal expenditures. The January-March GDP number was also revised upward from a record minus 14.2% annualized to minus 11.7% annualized.

Yet Japanese stock prices fell on the news, as investors, a) had already discounted good Q2 GDP numbers and b) were more concerned about the weak US consumer sentiment numbers and the stronger yen. In other words, US economic numbers and perceptions thereof are having a bigger impact on investor sentiment for Japanese stocks.

As has been the pattern for the past 10 years, foreign investors are calling the shots regarding the direction of Japanese stocks, i.e., the market goes up when they are buying and goes down when they are selling. Foreign net buying of over JPY1 trillion over the past several weeks has propelled the Nikkei 225 back over the 10,000 mark, but the Nikkei 225 is essentially moving in lock-step with the US market.

On the other hand, Japanese bond prices (JGB yields) and the yen have been discounting a more bearish scenario (i.e., JGB yields falling and high expectations for a stronger yen). Both of these scenarios cannot be right. If the brighter economic scenario that stocks are trying to discount is right, the Nikkei 225 will be at 13,000 by the end of 2009, bond yields will be at 1.8% and the yen could be below JPY100/USD. If the darker economic scenario being discounted by the bond and currency markets is right, the stock market could be back below 10,000, bond yields at 1.2% and the yen at JPY85/USD by the end of the year.

Disclosure: No positions.