The major selloff in auto-makers worldwide over the news around VW’s emissions scandal did not bode well for the reopening of the Japanese markets. Yesterday we were predicting the Nikkei to open down 2.75%, but the benign performance seen in European and US markets eased this back to only a 1.6% decline ahead of the open. Japan opened largely in line with these expectations, however the drop seen in the Nomura Manufacturing PMI immediately saw the market drop a further 0.7% to be down 2.3% on the day.
The selloff has been most pronounced in the telecommunications, industrials and IT sectors. Some of the worst performers were 7/11 food provider Warabeya Nichiyo at -18.2%, electrical insulator NGK Insulators at -10.6% and car parts manufacturer JTEKT Corporation at -9.8%.
Undoubtedly, uncertainties over the direction of US monetary policy in the wake of the Fed meeting last week have impacted Japanese markets, as well as the VW-induced selloff of auto market-related stocks. But the yen has also seen significant safe-haven buying as confusion clouded the trajectory of the US dollar in the wake of the Fed meeting.
The yen strengthened 1.7% immediately after the Fed meeting, and is still 1% stronger than where it was trading just before the meeting as volatile trading this week has spurred renewed bouts of yen buying. And indeed this yen strength has also been a key factor hurting Japanese equity prices.
An interesting aside to this are some of political developments in Japan of late. Prime Minister Shinzo Abe passed his totemic changes to the Japanese constitution allowing Japanese troops to be posted in combat for the first time since WWII. This change to the constitution has been an obsession for the right in Japan, but it is highly controversial in Japan and has provoked widespread public demonstrations and even violent scuffles on the floor of the Japanese parliament.
Public outcry against this constitutional change was one of the primary reasons for bringing down Abe’s first stint as PM in 2007. The change has become immensely symbolic for Abe, much as the privatisation of the lumbering state-controlled Japan Post was for Abe’s mentor Junichiro Koizumi in 2003.
Abe learnt from his unsuccessful 2007 attempt to change the constitution, and realised that such a change would only be palatable for the Japanese electorate if accompanied by the ‘sugar’ of fiscal and monetary stimulus – hence, Abe’s Three Arrows policy.
And the BOJ
Which brings us back to the yen and the prospects for the Bank of Japan (BOJ) to step up its stimulus program at its 30 October meeting. Abe’s approval ratings have taken a major hit in the wake of the constitution change, which was to be expected.
It seems no accident that the final passage of these changes occurred amidst the announcement of the lowering of Japan’s corporate tax rate and in the lead up the BOJ’s October meeting. Indeed, a rising chorus of Liberal Democratic Party (LDP) members have publicly stated that the BOJ should step up its monetary easing. Yasutoshi Nishimura, Japan’s deputy economy minister, did just that yesterday.
These developments, in the context of a textbook triangle formation pattern developing in the yen daily chart, make a compelling case for the USD/JPY to rocket up 4% or so into the 125 level in the lead up to the BOJ October meeting. And with Japanese CPI widely expected to turn negative in the release tomorrow, that could well provide the spark.