Japanese Stocks Surge on Fed Rate Cut Expectations: Global Capital Frenzy?
The recent global financial markets can be described as a "world of ice and fire." Everyone is aware of the situation with domestic A-shares, a topic that is too sensitive for me to discuss or even mention. However, when looking at the global perspective, it is evident that China is indeed surrounded by bull markets.
The Federal Reserve is about to cut interest rates, and global stock markets are strengthening, entering a major bull market?
Whether it's Europe, the United States, or even our neighbor Japan, the markets are soaring directly into the sky, with Japanese stock markets surging to record highs not seen in 33 years. I dare to talk about the situation abroad.
So, why are the financial markets of these countries performing so strongly? What lessons can they offer to the Chinese stock market? Today, let's discuss this topic. Writing is not easy, so welcome likes, shares, and bookmarks.
Why are global stock markets surging?
Analyzing financial markets requires a macro-to-micro approach. And the largest capital market globally is, of course, Wall Street in the United States.
Before October 2023, the U.S. stock market had been suppressed by the Federal Reserve's interest rate hike policy. Because of the rate hikes, U.S. dollars in the market kept flowing into banks and other systems to earn fixed interest income, leading to a lack of favor for risk assets like the stock market. So, during that period, the U.S. stock market was actually "relatively weak."
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However, after October, there was a 180-degree reversal. First, the U.S. CPI data showed an unexpected decline, indicating weakening inflation, which means that the policy space for the Federal Reserve became very large. Coincidentally, the U.S. had previously experienced an inversion of long-term and short-term interest rates, which implies that 2024 is definitely a year of recession.
Thus, the Federal Reserve, which was a beat behind, hinted that it would start considering interest rate cuts, and the market also provided a timetable for the Federal Reserve's rate cuts. I was very attentive to this matter in October. Because interest rate cuts are a significant positive for global financial markets. I even think it's a major利好 for A-shares.
The Federal Reserve's interest rate hikes had previously led to a weak stock market; now, with the prospect of rate cuts, they will promote stock market prosperity.Why do I say that? Because one of the feedbacks of interest rate cuts is the Federal Reserve's loose monetary policy, which leads to an increase in the amount of dollars and funds in the market, causing the U.S. stock market to soar. As a result, global liquidity has shifted from countries around the world flowing into the U.S. to the U.S. continuously spreading money outward.
So we have seen that in the past two months, the U.S. stock market has been very strong, with the S&P index rising by 15% over 55 trading days, not to mention individual stocks.
The strength of the U.S. stock market also actually affects the trend of global capital markets. For example, the European stock market was also relatively weak before, but the German Frankfurt index also rose by 11%, and the French stock market rose by 11% over 36 trading days. The trend is also very strong.
This is a simple spillover effect. As long as a country's financial and foreign exchange markets are freely flowing, the expectation of the Federal Reserve's interest rate cuts will definitely benefit a country's financial market.
However, there is one country that is quite strange. This country's economy has been very poor for decades, but recently it has made a counterattack and has even been sought after by Chinese stock investors, that is, the Japanese stock market.
Close to a 36-year high, why has the Japanese stock market made a counterattack?
At the beginning of this year, the Japanese stock market was very strong. Even yesterday, the Nikkei 225 index hit a 33-year high, boosting the Japanese domestic economy and increasing confidence in the capital market.
If we analyze the Japanese economy, we will find that its growth rate is not very good. Its GDP growth rate in 2023 is about 1.7%. Even in the previous years, the growth rate has been hovering around 1%, less than 2%. In terms of total volume, Japan is likely to have been surpassed by Germany this year, becoming the world's fourth-largest economy, not the second-largest in the world before.
The Japanese economy is actually performing average.
We all say that the stock market is a barometer of the economy, so why is the Japanese stock market performing so well when the Japanese economy is so poor? There are mainly some aspects worth learning from.Firstly, Japanese listed companies have relatively high quality and are well-governed. Previously, these companies thrived in a deflationary environment, choosing not to expand or distribute dividends after making profits, instead opting to save all their earnings.
However, Japanese listed companies have now become wiser, starting to adopt substantial dividend policies similar to those in the West. Warren Buffett has also announced investments in the Japanese stock market and acquired partial shares in Japan's five major trading houses, effectively underwriting them.
The net profits of these five trading houses amount to 42 trillion yen, with dividend payments reaching as high as 9.5 trillion yen, accounting for a significant proportion. As a result, Buffett has made a substantial profit from these dividends.
For Japanese investors, the previously stingy companies have now started to distribute dividends, which is equivalent to a much higher annualized return rate. Isn't this a better option than keeping money in the bank? Therefore, many investors have significantly changed their perception of Japanese listed companies.
Secondly, the Bank of Japan is about to exit the "negative interest rate era."
The Japanese economy has long been in a significant deflationary state, with reduced demand, overproduction by companies, leading to a very depressed and sluggish economy. At that time, then-Prime Minister Shinzo Abe implemented Abenomics, which involved the Bank of Japan purchasing a large amount of Japanese government bonds at a 0% interest rate in an unlimited quantity to suppress market interest rates, hoping to stimulate the Japanese economy.
However, with inflation in Japan approaching 4% in 2023, the country has actually experienced a certain level of inflation. Therefore, the monetary policy of the previous negative interest rate era is no longer suitable for Japan. The Bank of Japan will soon exit the negative interest rate policy and announce an interest rate hike.
The Bank of Japan's announcement of an interest rate hike will lead to an increase in Japanese government bond yields, causing a discount and impact on domestic assets in Japan. The assets of Japanese listed companies are undervalued.
The Bank of Japan's announcement of an interest rate hike could become a black swan event.
Since the assets are undervalued, investors will be more motivated to buy them. Therefore, Japanese investors, including retail and institutional investors, have started to sell off assets from various countries, allowing these funds to flow back to Japan and invest in the Japanese stock market, purchasing undervalued assets.So, when inflation returns, the prices and valuations of the Japanese stock market will also be reshaped. For example, a stock that was originally valued at 100 yen may rise to around 120 yen, which is also a macro force promoting the rise of the Japanese stock market.
Lastly, there have been significant positive changes in Japan's economic fundamentals.
In 2023, the official unemployment rate in China was announced at 5.2%, Europe at 6%, but Japan had an unemployment rate of only 2.6%, with job advertisements far exceeding job seekers. Coupled with the repatriation of manufacturing, Japanese companies implemented comprehensive pay raises at the beginning of 2023, leading to signs of economic recovery in Japan, which in turn stimulated consumption and investment in the stock market.
Therefore, there are indeed signs of recovery in the Japanese economy. The so-called "lost three decades" of Japan can now be considered a thing of the past. Although Japan may not be on par with the United States, it is still capable of holding its own against European economies.
Chinese investors bottom-fishing in Japan?
Compared to the capital markets of Europe, America, and other Asian countries, the recent performance of A-shares is hard to describe. Therefore, some domestic investors are optimistic about the Japanese stock market and choose to get involved, such as through some Japanese ETF funds.
However, we need to be aware that while these funds do indeed invest in the Japanese stock market, due to foreign exchange controls, they lack the ability to handle such a large influx of funds at the same time, leading to a premium. This means that the actual price is higher than the valuation, causing a sharp rise and fall, and significant plunges, resulting in losses.
Japan's ability to withstand such a massive debt also relies on zero interest rates, similar to what the United States had before. This means that as soon as Japan raises interest rates, the Japanese government would have to pay a terrifying interest expense for yen-denominated debt, leading to the collapse of the Japanese government's finances.
Therefore, Japan's interest rate hikes will not rise without limit. While the Japanese stock market is indeed strengthening, debt is its biggest hidden concern. The so-called bottom-fishing is a matter of personal judgment. Of course, we don't have much standing to talk about others, and it's estimated that after 3 o'clock today, A-shares will be trending again.
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