Shinzo Abe will on Friday meet with Donald Trump for the first U.S.-Japan summit with plenty of imports and exports to discuss. Notably, the Japanese prime minister prepared for the get-together with a visit to the president of Toyota Motor (TM) , Akio Toyoda, who is concerned that Trump has criticized the Japanese car industry's practices as "not fair."
These have been buoyant days for Japan equity bulls. Japanese stocks continued their progress through January, with the broad Topix index posting its fourth straight month of gains. That leaves it up 17% since early November. But strained trade relations would halt that momentum.
Abe was already the first world leader to meet Trump in person after his election, although British Prime Minister Theresa May beat him in his bid to hold the first official summit. There's sure to be the usual feel-good blather on Friday, but the Abe camp will be weighing which side of the protectionist vs. pro-business see-saw Trump is now sitting on. That is still anyone's guess, lots of rhetoric yet to be backed up by action.
Japan's major exporters will be on edge. Toyoda said last month that Toyota would make $10 billion in capital investments in the United States over the next five years, investment the carmaker insists is not related to Trump's criticism of U.S. and foreign auto companies alike.
Investors in Japan, where foreigners are the dominant force, are seeing sentiment shift back and forth on an almost daily basis. Trump has caused alarm by suggesting he may label Japan a "currency manipulator" alongside China. In fact, such a charge has a lot more merit in the case of Japan, where the central bank is heavily involved in policy and isn't above intervening in the currency markets (though it hasn't done so for several years).
The yen strengthened at the start of the year, pushing down shares of exporters and causing small-cap stocks to outperform big ones -- they are far more heavily focused on the domestic Japanese market. But the yen has now cheered the market with weakness induced by Federal Reserve chair Janet Yellen's repeated assurance that gradual pro-dollar interest-rate increases are on the way.
In January, Tokyo's transportation stocks were the top performers as investors warmed to the idea shipping prices were on the rise and air traffic strong domestically and internationally. Oil and coal stocks were next-best, lifted by the production-cut stances of major oil-producing nations and a correction in oil prices. Iron and steel companies also got a jolt from their success in raising prices, while pulp and paper stocks also performed well.
The biggest declines were posted by electricity and gas stocks, with investors worried about prospects for the nuclear industry in particular. Mining, real estate and transportation equipment makers also performed poorly.
The top gainers among large Japanese companies -- with a cutoff market capitalization of ¥500 billion ($4.45 billion) or more -- were silicon-wafer producer Sumco (SUOPY) T:3436, up 17.3% before it announces earnings on Wednesday.
The other top performers were oil producer Idemitsu Kosan T:5019 (+12.6%), with a boost from the buoyant sector, and electrical-equipment maker Yaskawa Electric (YASKY) (+12.3%) T:6506, which increased its full-year sales and profit forecasts.
Next in line among the top performers was Sprint parent and telecom conglomerate Softbank Group (SFTBY) , up 12.1%. It is expected to report a 38% increase in operating profit when it reports third-quarter earnings on Wednesday.
Robot maker Fanuc (FANUY) (+11.9%) rounds out the top five performers. It raised its operating-profit forecast by 4.3% as it reported earnings, benefiting from ratings upgrades from Nomura (NMR) and Credit Suisse (CS) .
The poorest performer was IT and networking specialist NEC (NNPPY) , down 15.8% after a ratings downgrade by Moody's. The ratings agency said it is worried over the company's ability to execute its business plan and increased uncertainty over whether it can sustain earnings, with pressure on its business as a telecom carrier.
Uniqlo parent Fast Retailing (FRCOY) (-14.9%) was next-worst, as it said same-store sales fell 2.5% in January. But it remains one of Japan's most dynamic companies, announcing it would expand into India, its first store likely in 2018.
Troubled Toshiba (TOSYY) shed 14.4%, while Mazda Motor (MZDAY) fell 12.8% as it cut its operating profit forecast 13% for the year ending this March. It is assessing the impact of the Trump presidency on its largest market, the United States, which accounts for one-fifth of sales. Sedan sales have slumped in Japan and the United States, with customers switching to SUVs.
Rounding out the bottom five was home-construction and real-estate brokerage company Daito Trust Construction (DIFTY) (-10.2%). It maintained a forecast increase in profit of 15.6% for the fiscal year ending in March that disappointed investors.
Toshiba has become a poster-boy for poorly run Japan Inc., as I explained at the end of last month. Its shares are down double digits this year after it admitted it would take a charge pegged at $6 billion by local media on its nuclear power plant business. That came on the heels of an accounting scandal in which it admitted inflating profits for years.
It has been forced to put up a minority stake of up to 20% in its best-performing business, making memory chips, to offset the nuclear loss. That was incurred when its U.S. subsidiary Westinghouse Electric bought a company that eventually posted much higher cost overruns on nuclear-construction projects than expected.
Japan's economy is gaining steadily. The Bank of Japan opted at its meeting at the end of January to keep interest rates steady and to maintain its target rate for mid-term 10-year Japanese government bonds at 0%. But it raised its forecast for growth for the fiscal year ending this March to 1.4%, up from 1.0%, and to 1.5% for the year ending in March 2018, up from 1.3%.
The BOJ now expects the economy to hit the target 2% rate set by its governor, Haruhiko Kuroda, in or around March 2019 - it forecasts inflation of 1.5% next year. So the central
The attempt to revive Japan's economy has led Kuroda to introduce unprecedented monetary easing. That's something Abe wants to see continue for years, he said recently, calling for whoever succeeds Kuroda to continue his policies. Kuroda's five-year term ends in April 2018, and Abe's support suggests he may consider a second term.
But "Kamikaze Kuroda," as CLSA equity strategist Chris Wood calls him, may be overdoing it. The Japanese economy is not in such bad shape.
The job to applicant ratio has risen to 1.43 as of December, the highest level since July 1991, Wood points out in his "Greed & Fear" newsletter. The number of job offers per applicant is also increasing, at 0.92 as of December, the highest rate since records began in late 2004.
Japan will have one potentially "black swan" event to contend with in 2017. The government is due to discuss the law changes necessary to allow Emperor Akihito to abdicate in favor of his elder son, the Crown Prince Naruhito. That will render this session of the Japanese government, which began Jan. 20, more important politically than it is economically, according to Société Générale (SCGLY) .
It will likely yield a small supplementary budget of around ¥200 billion by the end of February, the same as previous years. But the government may grant a one-time exemption to the rules to allow Akihito to step down in December 2018 and Naruhito taking his place.