BOJ Preview: The Long Japan / Short China Trade
Regardless of policy, Bank of Japan may move markets today: Japan, China and U.S. Equity Markets Ahead of January BOJ
“0% chance of a Bank of Japan policy tweak” later? Let’s think that over from the perspective of potential market reaction in the given setup, even with a no policy change outcome - particularly from the equities angle.
On the eve of the January 2024 Bank of Japan policy meeting, Japan equities hit another new ‘90s bubble era high on NKY225- now up almost +10% on “the year” (in the last 12 trading days of Jan ‘24).
Meanwhile, Chinese equities are getting slammed (still, and again), with Shanghai nearing new 20-year lows, and -7.5% in January.
The Long Japan / Short China (HK) Trade
…is really accelerating from the start of this month/year:
In the Long NKY / Short HSI chart above, this is no longer a slow drift higher due to a performance spread from still directionally aligned indices as was the case from early November ~ end of December. As per the yellow line steadily rising, then suddenly hockey-sticking vertically from the start of trading in ‘24- this is now a clear, outright directional split between Japan and China that almost inversely mirror one another from the start of the year.
It also suggests that perhaps the brutal selloff in China, as well as the simultaneous eye-popping rally in Japan, are at least in some part co-dependent upon one another- if not an actual long / short pair trade that is getting piled into. Japan surges as China gets crushed, China gets crushed as Japan surges, China gets crushed as China gets crushed, and Japan surges as Japan surges- momentum begets momentum.
And as NKY hits new 3-decade highs as Shanghai nears 2-decade lows, Japan retail - armed with their new NISA investment accounts, have been net selling ¥1tn+ in domestic Japan equities for 5 consecutive weeks.
This doesn’t mean Japan retail isn’t putting their NISA accounts to work, let alone divesting- as I discuss in my recent article Japan Rejoins Global Markets: Watch US Equities as New NISA Launches Japan retail has $7 trillion in cash that may be about to be allocated- but to where? Signs point to US equities
Japan retail (and Japan institutional for that matter) seem to have an unbreakable bias towards favoring U.S. equities- and the 2023 Japan equity global outperformance showed how unconditional that “market is greener on the SPX side” domestic retail sentiment is- Japan domestics were net sellers into NKY and TOPIX surging to 3 decade highs, with some even saying things like “Berkshire drove up stock prices, but to sell it off to who? Us, the JAPANESE suckers! Long NKY??? No thanks.” …type of rhetoric (seriously, I can’t make that up if I tried). So, if/when Japan deploys bits and pieces of its trillions in mattress-cash into green and red blinking tickers, they unconditionally avoid home base, and go long US, be it Japan outperforming or getting killed.
Rakuten Securities (one of the major Japanese online retail brokerage platforms) recently said that the amount of new NISA account openings in recent weeks has been massive - threefold year over year. Japan retail is not net-selling equities entirely, they’re just net-selling Japan equities, but their preference for overseas equities / skepticism of domestic stock rally remains strong.
BOJ vs PBOC
Fundamentally, from a policy stance, this would reflect current perceptions of BOJ vs PBOC. And not actually that of a policy divergence underway- as both are perceived to be on hold with their current policy stance, but rather their respective circumstances under which they are maintaining as-is. For now, both BOJ and PBOC are seen as being on pause: BOJ expected to remain dovishly on-hold by not exiting negative rates as per recent expectations in the wake of the magnitude-7.6 earthquake that hit Japan’s western Noto Peninsula on New Year's Day, while PBOC is hawkishly on-hold by keeping MLF rates unchanged against expectations for a cut last week.
Among the 50 “economists” surveyed by Bloomberg just last month in December, 15% had been calling for BOJ’s -0.1% policy rate to lift out of negative territory at the Jan 2024 meeting. That number has now dropped to zero on the eve of the Jan 2024 BOJ meeting in the wake of the Noto Peninsula earthquake and tsunami from New Year's Day.
Personally, I don’t see how this particular earthquake and tsunami has any impact on BOJ negative rate policy decisions, damaging and still-ongoing as they are. That aside, what’s even more strange to me is that they just shifted the end of negative rates from the January BOJ meeting to the April BOJ meeting - citing the BOJ’s need to see how the annual spring wage negotiations go.
Another “amusing” thing with BOJ and PBOC in the current long Japan / short China dynamic underway - we’re now getting media reports of BOJ potentially turning net SELLERS of equities, while PBOC/government has been “stealthily” BUYING equities - and both to no avail with market impact respectively.
China:
“The slump once again coincided with a jump in turnover on a handful of exchange-traded funds tracking the key indexes, a sign that state-led buying may be behind the unusual spike.“
Bloomberg: China Stock Selloff Worsens as Hong Kong Index Nears 19-Year Low
Japan:
“Sales in calendar 2023 are estimated at around 300 billion yen, exceeding the 210 billion yen in ETF purchases. Stock prices rose during the year, so the actual sales may have been even higher.
Purchasing ETFs is a function of the BOJ's monetary policy, while buying bank stocks is a function of its financial system stability policy. Both are managed by different departments.
The BOJ says that the two functions should not be compared against each other. But if one department sells more than the other buys, the bank as a whole becomes a net seller as a matter of fact.”
Nikkei: BOJ turned 'net seller' of stocks in 2023
China, Japan, and US Equities
To tie it all together, the current picture is as follows:
Large-cap index heavyweights are slamming China’s market selloff, which propels a foreigner-driven Japan equity rally - also concentrated in Japan large-cap heavyweight stocks and index futures, which then pushes Japan retail to pile into US large-cap index heavyweight “Mag Seven” stocks, and helps push SPX to record highs. And all of which feed upon each others’ collective momentum.
Therefore, any BOJ policy tweak later today at the January meeting, or even just a change in perception from current expectations of policy maintained (a matter for Gov Ueda’s press conference) can potentially throw off the current flow dynamics and trigger a sharp profit taking reversal. May very well be a shallow and short-lived moment of downside, but BOJ a market momentum pivoting catalyst nonetheless, particularly as NKY inches closer to its 39k all time high.
Similarly, BOJ confirming recent expectations of remaining on “hold for longer” can potentially further accelerate the current trend.
Either way, I just wanted to point out a simple set of facts that may or may not mean anything in a few hours, but for now, is very weird to be completely brushed aside:
Heading into a BOJ meeting which had expectations for a first rate hike out of Japan since 2007, for which the reasons that those who were calling for a January negative rate exit (whether agree or not with those reasons) are still very much there, and this being the central bank who ONLY moves on surprise and never under market pressure- markets look like this:
NKY +10% in Jan, nearing bubble highs, due to foreign flows fleeing China, and not purely on Japan merit.
JPY is once again world’s worst performing major currency in Jan, now nearing yentervention highs.
JGB yields have gotten crushed, 10Y JGB yields closer to the old-old 50bps YCC upper band (back when there was an upper band), and 2Y JGB yields hit negative in Jan.
So, “0% chance of a policy tweak” later?
It's never 0% nor 100% anything, and the fact that 99% will say “0%” is precisely why it’s more like 50/50.
So just watch out, these Bank of Japan folks are policy opportunists who are inextricably tied to market conditions and don’t have the luxury of waiting to see for “long and variable lags.” They move if and only when they think they have a window. And they have a window today.
Will update on BOJ after I digest whatever comes or doesn’t, and more (most) importantly, what green and red blinking tickers are doing in the wake of BOJ, keeping ECB on deck in mind - stay tuned.
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