Primer On Japan (In Four Posts)

Over the past few weeks, we have sketched out an alternative narrative about Japan. We see the key problem Japan faces as stemming from surplus savings in the corporate sector. There is little appetite for greater domestic investment (outside of reconstruction) nor a willingness to boost wages meaningfully.

We argue that the dollar's advance from JPY76 was the market pricing in Abenomics and that the bulk of the move is behind us. The issue here is one of recycling the capital inflows into the country primarily in the form of portfolio capital (especially equities this year) and the repatriation of income from foreign investment.

Many are surprised by the lack of net purchases of foreign assets by Japanese investors this year, in the face of the yen's decline. We are not. The conventional narrative anticipated Japanese investors buying foreign bonds at record high prices and deteriorating quality (many of the core bond markets are on credit review).

Here are links to four recent posts that we provide some flesh to these bones and may serve as our primer on Japan:

1. Nothing Fails like Success: Offers a broad interpretative overview

2. Displaced JGB Investors: Focuses on the the capital flow dimension

3. Two Misunderstandings about Japanese Trade: Contrary to what is often claimed, Japan's exports, as a percent of GDP, are on par with the US in the mid-teens, well below the levels of many European countries, including Germany and Switzerland. Moreover, Japanese companies service foreign markets primarily by building locally and selling locally. Consider Japanese brand autos in the US--some 70% are made there.

4. Japanese Corporates are Not Yen Bears (Any More): A survey conducted on behalf of Thomson Reuters found that many Japanese businesses no longer seek a weaker yen. Part of the reason a weaker yen is undesirable has to do with the internationalization of Japanese production. This does not necessarily offer insight into the future direction of the yen, but it does complicate the simplistic notions of businesses uniformly seeking currency depreciation and currency wars.