Japan: DZH Financial Research

Fumitaka Noguchi is a prominent analyst in Japan.  He is the Senior Analyst and ETF Executive Adviser at DZH Financial Research in Tokyo.  He writes a weekly, widely read commentary about Japanese markets.  It was fascinating to hear his perspective.  He is a fellow graduate of New York University, and I enjoyed our lively discussion about Japan and the global economy.

Here is a summary of some of my notes from our meeting:

Nominal Japanese GDP

We talked extensively about his most recent commentary on Japanese markets, published on June 1st.  Although the report is in Japanese, the core message of the report is found in two compelling graphs.  The first graph shows that nominal Japanese GDP is lower today than it was back in 1997.  It highlights that Japan has been in the grips of deflationary pressures for two decades.  This chart also overlays a chart of the Japanese stock market. 

I asked him for his views about the reason for economic stagnation for two decades, and he immediately pointed to limited monetary stimulus.  He pointed to the past two years on this chart, nominal GDP is higher, and the stock market has surged.  He credits the new policy from the Bank of Japan—Governor Kuroda’s aggressive monetary easing.  This is the reason that Japan is getting out of deflation.  He believes that the market is already discounting a move from a deflationary environment to a reflationary environment.

Japanese Corporate Profits

The second chart in his report shows Japanese corporate profits and the Japanese stock market.  Japanese corporate profits are growing strongly, and he pointed to the impact of the depreciating Yen.  Corporations are changing in Japan (this was a continued theme).  He believes that corporations are becoming more “profit-minded.”

He expects the Bank of Japan to continue its stimulus.  Even if the Yen is stable, he believes that stronger corporate profits are enough to support equities.  He felt that Prime Minister Abe had much more support from the population than any recent Prime Minister.

We talked extensively about the nature of Japanese financial markets.  While there is an export sensitivity, he made a strong point to think about major Japanese corporations as “global companies” rather than as “Japanese exporters.”  He pointed out that Honda is a Japanese company, but it is not driven by exports.  Instead, Honda has operations all over the world.  It is a Japanese company with significant foreign revenues.

He sees a slow but steady move out of holdings at banks and into the market.  The U.S. mutual fund market is more than four times the Japanese mutual fund market.  While ETFs are in their infancy in Japan, they are gaining traction. He marveled at the quick adoption of leveraged ETFs in Japan!

John Lunt with Fumitaka Nogushi

We not only talked about opportunities, but also about some of the risks facing Japanese financial markets.  Japanese government debt is high, but he believes that this might be less of a problem than people think.  Japanese saving rates are very high, and the majority of government bonds are held domestically.  This makes a debt crisis less likely.  Given Japan’s aging population, there is tremendous need for social security restructuring.  According to Fumitaka, 40 years ago only 5% of the population was over 65 years old.  Now, 25% of the population is over 65 years old. 

Fumitaka is less worried about interest rate hikes in the U.S.  He sees the largest risk coming from a deceleration in the Chinese economy.  While political relations between Japan and China are not so good, he did not think that this would impact markets.

Fumitaka was really enjoyable to talk with, and he echoed two themes that I heard during official meetings and in casual conversations:

Prime Minister Abe and aggressive policy from the Bank of Japan have changed financial markets.

Japanese companies benefited from a weaker yen, but better corporate governance will lead to a lasting change.

Special thanks to Brennan Staheli, Joe Dunbar, and the Lunt Capital team for their contributions to this report.