Nikkei 225 Breaks 200-day MA
As pointed out by fellow Seeking Alpha blogger Clive Corcoran ("On the Nikkei's Break Below Key Negative Levels"), Japan's Nikkei 225 last week broke below two major support levels, completing a move below all three key moving average levels with a close below the 200 day EMA. The most pressure is coming from domestic institutional investors, who have dumped over JPY1 trillion of Japanese stocks since July, almost completely offsetting the JPY1.45 trillion of net buying by foreigners, who have turned net sellers in the last couple of weeks.
DPJ's Communication Problems
The new Democratic Party of Japan-led government is showing their lack of experience communicating with business and the financial markets, exacerbating concerns about the sustainability of Japan's recovery.
Firstly, the new Finance Minister Hirohisa Fujii (as well as BOJ Governor Shirakawa) basically gave the green light for currency traders to test how far the yen could appreciate. Minister Fujii is now back-tracking and making noises about possible intervention.
Secondly, Financial Affairs Minister Shizuka Kamei promised a moratorium on debt repayments for small businesses, which hurt the stock prices of financial firms beginning with the banks. The government is now trying to paper over these comments.
Thirdly, Transportation Minister Land and Transport Minister Seiji Maehara first appeared to take a hard line vis-à-vis saving the national flag carrier, Japan Airlines. The airline’s financiers were already balking at providing additional funding without government guarantees, and the Transport Minister rattled investors and overseas JAL partners by stating that the Company’s revitalization plan was “not acceptable” without indicating whether the government was committed to supporting the firm or not.
He was forced to come out and publicly state in an “emergency” press conference that the government was committed to saving JAL after the stock price plummeted further and overseas business partners were beginning to withdraw credit. An overseas insurance company that provides coverage to travel agencies for such situations as grounded flights decided to exclude JAL from its coverage, and the credit card purchase of a JAL ticket was refused in the U.K.
Further, the perceived upshot of new DPJ policy measures is that they will first hurt GDP growth, at a time when Japan can little afford to lose more economic growth. The Nikkei estimated that the policies would shave GDP growth by 0.2% in FY2010. Since Japan has come to expect economic stimulus in the form of pork-barrel public works projects, the DPJ’s axing of public works expenditures put in place by the Aso Administration, could trim GDP growth by 0.2% this fiscal (FY09) year. Trimming a total of JPY8.5 trillion from public works budgets, ministry operational budgets and government personnel expenditures by fiscal 2013 would ostensibly put a drag on growth of 0.1 point in fiscal 2010 and 0.6 point in fiscal 2011.
On the other hand, new DPJ policies such as the child care allowance will be provided at 50% in fiscal 2010, and at the full level from fiscal 2011. Free high school education and the end of income tax exemptions for dependent children and spouses will be implemented in fiscal 2010. In other words, the positive impact of the DPJ policies will take longer to have a positive impact.
Moreover, PM Hatoyama’s bold promise for a greenhouse gas reduction target of 25% and the DPJ’s decision to principle ban temporary workers for manufacturing jobs has Japanese businessmen flustered and concerned. Businesses claim that meeting the greenhouse emission targets would ostensibly result in domestic steel production being reduced by 20%, according to the Japan Iron and Steel Federation, while it would force some ethylene plants to cease operations, say chemical industry execs. The Japan Automobile Manufacturer’s Association is claiming that the ban on temporary factory workers would have “a serious impact on small and medium-sized parts makers”.
Some think-tank gurus are now predicting a new production shift, as these policy changes coincide with the disappearance of the consumption boom in the US and Europe that was driving exports and the surge in the yen—forcing Japanese companies to again hollow out domestic production capacity.
Some 40% of CEOs Now Fear a Double Dip
All of these concerns were recently reflected in a Nikkei (Japan Economic Journal) survey of 100 Japanese CEOs. Nearly 40% of these CEOs now see a "high to somewhat high" chance of a double dip in Japan's recovery, with over 69% seeing the impact of stimulus wearing off, over 38% seeing a negative impact from the strong yen and 36% blaming the possible double dip on the new government's policies.