Kishida's NISA Bet Is Paying Off, Just Not for Japanese Stocks

Stocks

Summary:

Japan's big tax break to incentivise its citizens to funnel some of the trillions of yen held in cash into stock market investments and boost the economy is succeeding, but only partially.

Under Prime Minister Fumio Kishida, the Nippon Individual Savings Account (NISA) programme - which exempts retail investors from paying capital gains taxes on holdings of stocks - is expanding significantly in scope from January.

And yet, investments under the nine-year-old scheme have historically gone primarily into U.S. stocks, and that Japanese affinity for U.S. stocks could mean Nasdaq is NISA's biggest winner.

Conversations with brokers and retail investors suggest Japan is having some success with NISA - households are channeling more savings into stocks and taking more risk.

But Kishida was also hoping wealth will be better distributed and household savings will be recycled through companies. That remains wishful thinking.

Overseas stocks dominate the popular investment product rankings at online Japanese brokerages, such as the Monex Group and SBI Securities.

Ideally, Japanese investors would invest in the domestic stock market, inspiring foreign investors to also buy Japanese stocks and in turn broadening Japan's capital markets in what would be "a very happy scenario for the Kishida administration", said Takashi Hiroki, chief strategist at Monex.

"The goal of the Kishida administration is to increase household assets. At the end of the day, it's okay if Japanese household assets are increasing and increasing."

That they were investing abroad, however, was unfortunate for Japan's capital markets, he said.

In an aging society where retiring comfortably on a national pension seems increasingly uncertain, NISA has since 2014 been used by working residents and retirees hoping to grow their assets.

Japanese households hold more than 2.1 quadrillion yen ($14.16 trillion) of financial assets, yet their reluctance to take on risk has meant they keep more than half of it in cash, far more than in other developed economies.

Kishida wants to change that mindset in order to create a new, sustainable form of capitalism in the world's third-largest economy. The prime minister has led government efforts to expand NISA, increasing the total any person can hold under the scheme to 18 million yen from 2024 and making it permanently tax-exempt.

With these changes, the government aims to double in about five years the 33 trillion yen NISA investment balance at the end of June.

Nasdaq Over Nikkei

Interest in NISA has grown since the pandemic as mom and pop investors and even younger Japanese were roused by social media influencers into buying stocks. The number of NISA accounts tops 19 million, not significant in a 123 million population, but has risen 46 per cent since 2019.

Analysts at J.P. Morgan expect NISA balances could increase by 45 trillion yen over five years if an average of three million accounts are added annually and purchase amounts increase.

"Nearly 60 per cent of new money under the NISA framework will likely go to foreign investment trusts, mainly for U.S. stocks. The remaining 5-9 trillion yen will be allocated for Japanese stocks," said Masanari Takada, a quantitative and derivatives strategist at J.P. Morgan Securities.

Monex estimates the proportion of Japanese investors buying purely local stocks dropped to 24 per cent from about 40 per cent over the past 10 years and the top 10 most popular NISA investment packages on its website hold mostly U.S. stocks.

Although investors of all ages are drawn to U.S. stocks, "young people tend relatively to gravitate more toward American companies," said Maho Tsugawa, a manager at Monex's public relations office.

"There's some discussion that stock prices don't really increase in Japan, and so if you hold onto stocks for a long time to accumulate wealth through something like NISA, prices gradually go down and you end up losing."

While Japan's Nikkei Average has had a stellar year with 28 per cent gains, its 113 per cent rise in the past decade pales against the U.S. stock market's 265 per cent rally.

Analysts at BofA say Japan’s investment trusts have been consistently buying foreign equities since 2014 but not local equities.

Such investor bias would botch one part of the vision Kishida has touted since being elected in 2022.

"I think the Japanese government wants money to flow domestically and boost Japanese shares," said Naoki Fujiwara, senior fund manager at Shinkin Asset Management.

"But the government's objective is to boost individual financial assets, and it does not matter whether that will be achieved by investing in Japanese or U.S. stocks."

Investment habits are changing.

Toyama, a 59-year-old investor, who wants to go only by his last name, buys investment trusts and ETFs via NISA. Toyama hopes to turn more aggressive.

"I already have investment trusts that track S&P. I may start investing in individual stocks when the new NISA system starts next year," he said.

($1 = 147.2600 yen)

Source: Reuters

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Damon

Bond

In a year in which little has gone right in the US bond market, November turned out to be a month for the record books.

Investors frantically bid up the price of Treasuries, agency and mortgage debt, sparking the best month since the 1980s and igniting a powerful pan-markets rally in everything from stocks to credit to emerging markets. Even obscure cryptocurrencies, the sort of speculative, uber-risky assets that struggled when yields were soaring, posted big gains.

For those bond investors bracing for a possible third straight year of losses — an unprecedented streak in the Treasuries market — the rally was desperately needed. The Bloomberg US Aggregate Index has returned 4.9% this month through Wednesday as the yield on the 10-year bond, the benchmark for everything from home loans to corporate debt, sank more than 0.65 percentage point to 4.26%.

Whether the rally extends into December and then 2024 depends on if the principal forces behind it — signs that the economy and inflation are slowing and that the Federal Reserve is done hiking interest rates — keep building. Cooling jobs data and soft CPI figures proved a boon for bonds in November, while dovish comments from Fed Chair Jerome Powell to Governor Christopher Waller added fuel to the advance.

"We've been getting economic data recently that reinforces the idea of the Goldilocks slowdown," said Rebecca Patterson, former chief investment strategist at Bridgewater Associates. "Inflation is coming down, and at the same time it hasn't been unduly impinging growth."

Signs of a so-called soft landing for the US and global economy and plunging borrowing costs have sent the MSCI World Index soaring 8.9% this month, while emerging-market shares have gained 7.4%. The Bloomberg Galaxy Crypto Index, which measures the performance of the largest digital currencies, advanced 18%.

In credit, US junk bonds have rallied more than 4%, the most since July 2022, as investors plowed a record $11.9 billion into exchange-traded funds tracking the asset class, the most ever, according to data compiled by Bloomberg.

"There's a little bit of the fear of missing out," said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. "Suddenly 5% yields on the 10-year Treasury have become a distant memory."

Amid the string of soft data and dovish Fedspeak, expectations for US interest rate cuts continue to be brought forward. Traders are now pricing in about 1.15 percentage points of policy easing for 2024, with the first cut now expected at the central bank's May meeting, according to data compiled by Bloomberg. Billionaire Bill Ackman said recently he expects the Fed to act even sooner, saying cuts could come in the first quarter.

Such a quick pivot could prompt a flood of short covering, market watchers say. In fact, given the magnitude of this month's move, it's likely that long-time bears such as commodity trading advisers are already headed for the exits, according to Vineer Bhansali, founder of the Newport Beach, California-based asset-management firm LongTail Alpha.

"These types of massive moves can really only be ascribed to positioning changes," Bhansali said, adding that he's positioned for the yield curve to steepen. "I can see two-year notes rallying 50 to 100 basis points if this Fed pivot is really going to happen. And if that doesn't happen relatively soon, then 10-year yields will go back to the 4.5% to 5% range."

Yields above 5% last month persuaded active bond managers at Pacific Investment Management Co., Doubleline Capital, Capital Group and Columbia Threadneedle, among others, to load up on longer-dated debt. This week's JPMorgan Chase & Co. client survey revealed that active investors have only kept adding to those bets, with so-called net longs jumping to a record 78% of those surveyed.

Among the bigger winners, Western Asset Management's core plus bond fund has gained 6% in the past month, topping 98% of peers and pushing the $22 billion fund back into positive territory for the year.

Conceding they had been too early anticipating an end to Fed tightening and lower inflation, portfolio manager Mark Lindbloom noted that "it's been a very painful adjustment over the last year and a half."

Western Asset has shifted more of its rate exposure to the two- and five-year sectors from the long-end, while remaining overweight agency mortgages, he said.

"In the last 25 years the Fed has been through five tightening cycles and when they get to that last tightening and arguably we've seen that for six months down the road, you see the two-year or five-year rally substantially," Lindbloom said.

Source: Bloomberg

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Titan FX

Commodity

Gold Price Technical Analysis

Gold remained in a positive zone above the $1,965 level. There was a steady increase above the $1,980 and $1,985 resistance levels to start a fresh rally. Gold Price Rally Pauses but Not Likely Over_1

Gold Price Rally Pauses but Not Likely Over_1

The 4-hour chart of XAU/USD indicates that the price surged above the $2,000 and $2,020 resistance levels. The price even settled above $2,000, the 100 Simple Moving Average (red, 4 hours), and 200 Simple Moving Average (green, 4 hours).

Finally, the price tested the $2,050 resistance zone. If the bulls remain in action, the price could rise further toward the $2,062 level.

An upside break above the $2,062 level could send the price soaring toward the $2,080 resistance. The next major resistance is near the $2,088 level, above which Gold could test $2,100.

On the downside, the first major support is near the $2,032 level. The main support sits near the $2,025 level. There is also a key bullish trend line forming with support near $2,025 on the same chart. Any more losses might call for a move toward the $2,000 level.

Looking at crude oil prices, the bulls appeared near the $72 zone and the price is now attempting a recovery wave.

Economic Releases to Watch Today

US Initial Jobless Claims – Forecast 220K, versus 209K previous.

US Pending Home Sales for Oct 2023 (YoY) – Forecast -2.0%, versus 1.1% previous.

Canadian GDP for Q3 2023 (Annualized) – Forecast +0.2%, versus -0.2% previous.

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Stocks

Wall Street ended the session flat overnight (DJIA +0.04%; S&P 500 -0.09%; Nasdaq -0.16%), with some de-risking observed shortly after opening while the Volatility Index attempted to stabilise around its 2023 lows. Some attention was on the US 3Q gross domestic product (GDP) data release, but its upside surprise failed to sway Federal Reserve (Fed) rate-cut bets much, with the data being backward-looking. Sentiments continue to take its cue from more recent Fed comments to price for 125 basis point (bp) worth of rate cuts by end of 2024.

Aside, the Fed beige book also revealed that US economic conditions have continued to moderate as well, with slower consumer spending, softer labour demand and moderating inflation providing the conviction for more wait-and-see from US policymakers. As such, US Treasury yields declined for the third straight day, with the US 10-year yields touching the 4.255% level. Lower yields did not manage to drag down the US dollar (+0.2%) overnight, although at this point, the broader downward bias in the greenback may remain until it reclaims its 200-day moving average (MA).

Ahead, the US core personal consumption expenditures (PCE) price data – the Fed's favoured inflation metric will be in focus. Expectations are for US headline PCE to moderate to 3.0% year-on-year in October from previous 3.4%, while the core aspect is expected to soften to 3.5% from previous 3.7%. The data will be on watch to clarify the extent to which the disinflation process was continuing, which will be key to support market pricing of rate cuts as early as May 2024.

The Russell 2000 index failed to reclaim its 200-day MA for now, with an overnight retest met with a strong bearish rejection, which proves the trendline as a key resistance to defend from sellers. An inverse head-and-shoulder formation breakout may still leave hopes of further upside into year-end, but a move above yesterday's high will be warranted to reflect greater control from buyers, alongside a move back above its 200-day MA. That may then pave the way for the index to retest the 1,900 level next.

Asia Open

Asian stocks look set for a subdued open, with Nikkei -0.41%, ASX -0.07% and KOSPI -0.00% at the time of writing. Chinese equities have been lacklustre in the earlier session yesterday, and the purchasing managers index (PMI) releases this morning shows that market participants were right in staying cautious. The Nasdaq Golden Dragon China Index was down 1.3% overnight.

China's November manufacturing PMI came in lower-than-expected (49.4 versus 49.7 forecast), reflecting a deeper contraction in manufacturing activities as continued weakness remains the takeaway. Non-manufacturing PMI has also softened to 50.2, heading to a different direction from the improvement to 51.5 which market participants were expecting. The confluence of the data brought the general PMI to another new low since January 2023. Still-weak data may see authorities laying more options of policy support on the table, while markets continue to seek for the conviction for a sustained recovery in the world's second largest economy.

The Hang Seng Index (HSI) continues to trade in a descending wedge pattern, unwinding close to 70% of its reopening bounce from late last year. Its weekly relative strength index (RSI) remained below the key 50 level as a sign of sellers in control, with any breakdown of its October 2023 low ahead potentially supporting further downside to retest its October 2022 bottom. The weekly Ichimoku cloud zone remains a key resistance to overcome to provide conviction for an upward trend reversal. Until then, a continued subdued showing may persist into year end. China PMI Disappoints, Hang Seng Index Back at October 2023 Low_2

China PMI Disappoints, Hang Seng Index Back at October 2023 Low_2

On the watchlist: Gold prices continue to hang near its six-month high

The upward revision in US 3Q GDP growth overnight failed to deter Fed rate-cut bets, as market sentiments continue to hang onto more recent Fed comments to price for 125 bp worth of rate cuts by end of 2024. With that, US Treasury yields followed through with its third straight day of decline, keeping gold prices stay supported at its six-month high, although gains were capped by some resilience in the US dollar.

Nevertheless, staying above its key psychological US$2,000 could keep the upward bias intact. With the yellow metal trading in a broad rectangle pattern since July 2020, the upper resistance at the US$2,070 level will be key to overcome for buyers, with any breakout of the range potentially leaving the US$2,274 level on watch over the longer term. China PMI Disappoints, Hang Seng Index Back at October 2023 Low_3

China PMI Disappoints, Hang Seng Index Back at October 2023 Low_3

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FastBull Featured

Daily News

[Quick Facts]

1. Wall Street calls for support of new candidates to replace Biden and Trump.

2. Mester: monetary policy in a "good place" to assess incoming data.

3. Beige Book shows slower U.S. economic activity.

4. Two hawkish Fed officials release dovish views.

[News Details]

Wall Street calls for support of new candidates to replace Biden and Trump

Wall Street leaders are looking past President Joe Biden and former President Donald Trump, the presumed major party nominees, for long-shot candidates to shake up the 2024 election less than two months before primary voting starts, according to media reports. JPMorgan Chase & Co. CEO Jamie Dimon said Wednesday that voters should support former South Carolina Governor Nikki Haley as one potential alternative to Trump for the GOP nomination. Bill Ackman, founder of Pershing Square Capital Management, said that Biden should step aside for a new candidate to emerge. A last-minute push for another candidate is unlikely to change the outcome of the nomination, but the desire for a new candidate underscores the deep dissatisfaction many voters have with Biden and Trump.

Mester: monetary policy in a "good place" to assess incoming data

Cleveland Fed President Loretta Mester hinted in a speech Wednesday that she would support leaving interest rates unchanged at the Fed's December meeting.

Mester said that monetary policy is in a good place for policymakers to assess incoming information on the economy and financial conditions and judge whether policy is well calibrated to ensure that inflation is on a timely path back to 2%.

Despite the overall economy remaining relatively strong, notable progress has been achieved in fighting against inflation. Mester did not explicitly say she would support a third consecutive pause in rate hikes next month, but her remarks echoed those of other hawkish policymakers this week. Mester held open the possibility that rates could rise in the future, saying it would depend on economic conditions and progress in achieving the dual mandate.

Beige Book shows slower U.S. economic activity

The latest Beige Book showed an overall slowdown in U.S. economic activity in the six weeks ended Nov. 7, as well as a decline in the economic outlook. Consumers become more price-sensitive and spend less on non-essential and durable goods. Meanwhile, demand growth in the labor market slowed despite tight market supplies. Price increases have largely slowed down, with moderate price increases expected to continue into next year.

Retail sales showed mixed performance, especially those including automobiles.

Sales of non-essential and durable goods, such as furniture and electrical appliances, declined on average as consumers became more price-sensitive. Tourism activity remained generally healthy, but demand for transportation services was subdued. Manufacturing activity was mixed, and manufacturers' outlooks weakened.

Commercial real estate activity continued to slow, the office segment remained weak, and multifamily activity softened. Several districts noted a slight decline in residential sales. Inventories of homes for sale increased in some districts.

Demand for labor continued to ease. Wage gains were moderate in most districts, and many districts reported some easing of wage pressures. Starting salaries even declined in some districts. Nonetheless, some wage pressures remained, and attracting and retaining high-performing employees and workers with specialized skills continues to be a challenge.

Two hawkish Fed officials release dovish views

Two Fed's "big hawks" who pushed for big rate hikes last year to curb inflation hinted that they are now happy to see interest rates remain unchanged, reinforcing expectations that the Fed's current rate-hiking cycle is over.

Fed Governor Waller, one of the most hawkish Fed officials, said that policy is well positioned to return inflation to the Fed's 2% goal, suggesting that policymakers may not need to raise rates again.

Another hawkish governor, Bowman, said she would still be willing to support a rate hike if inflation progress stalls, but she did not take a position in favor of a rate hike next month.

The remarks of these two officials did not fundamentally change the expectations for the Fed's December meeting, but Waller's statement indicates that more Fed officials support for holding rates steady at a time when economic activity, inflation, and the labor market are showing signs of cooling.

Both Waller and Bowman pointed out that there are still many uncertainties about how policy will unfold. Bowman even said that she still supports further policy tightening, but she now sets more preconditions for a rate hike compared to her previous statements.

[Focus of the Day]

UTC+8 18:00 Eurozone HICP Prelim YoY (Nov)

UTC+8 21:30 U.S. PCE Price Index (Oct)

UTC+8 21:30 Canada GDP (Sept)

UTC+8 22:15 New York Fed President Williams Speaks

UTC+8 00:00 Next Day: BOE MPC Member Greene Speaks

UTC+8 01:00 Next Day: ECB Governing Council Member Nagel Speaks

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Samantha Luan

Forex

The dollar was rooted near a three-month low on Thursday and was set to post its steepest monthly decline in a year as investors ramped up bets that the Federal Reserve is done with rate hikes ahead of a crucial inflation report later in the day.

The dollar index, which measures U.S. currency against six rivals, eased 0.058 per cent to 102.74, not far from 102.46 - its lowest since Aug. 10 it touched on Wednesday.

The index is down 3.7 per cent in November on growing expectations the Fed will cut interest rates in the first half of 2024.

The dollar clawed back some of its losses on Wednesday after data showed the U.S. economy grew faster in the third quarter than initially reported.

"I think it's still pretty much all about U.S. yields. And by extension FOMC policy," said Carol Kong, currency strategist at Commonwealth Bank of Australia.

"Markets will continue to play to focus on what FOMC officials say about the prospect of the upcoming rate-hike cycle."

Investor focus will be on comments from Fed Chair Jerome Powell, who is due to speak on Friday in the wake Fed Governor Christopher Waller on Tuesday flagging a possible rate cut in the months ahead.

But before that, spotlight will be on Thursday's crucial personal consumption expenditure (PCE) inflation report.

Christopher Wong, currency strategist at OCBC, said the data will offer a glimpse into whether the disinflation trend seen so far remains intact. "If core PCE undershoots expectations to the downside, then USD may extend the move lower again."

U.S. financial conditions are the loosest since early September and have eased 100 basis points (bps) in a month, according to Goldman Sachs. The bank's global and emerging market indexes ticked up a bit last week, but financial conditions are also looser by around 100 bps from a month ago.

U.S. rates futures markets are now pricing in more than 100 basis points of rate cuts next year starting in May, and the two-year Treasury yield is its lowest since July - it has slumped nearly 40 basis points this week alone.

The weakness in the dollar has allowed most Asian and regional currencies to take advantage. Two of the best-performers are at the polar opposite ends of the 'carry' spectrum - the New Zealand dollar and Japanese yen.

The kiwi got an extra boost on Wednesday following the central bank's 'hawkish hold' - policymakers kept the key cash rate at a relatively high 5.50 per cent, but unexpectedly signalled that it could be raised again if inflation doesn't moderate.

The currency was 0.26 per cent higher at $0.6172, staying close to the four month peak of $0.6207 it touched on Wednesday.

Meanwhile, expectations that the Bank of Japan will soon end its negative rate policy has pulled the yen up from the depths, and in the process, eased pressure on the central bank to support the currency via direct FX market intervention.

On Thursday, yen strengthened 0.09 per cent to 147.11 per dollar, remaining close to two and half month high of 146.675 per dollar it touched on Wednesday.

Sterling was last at $1.2695, up 0.01 per cent on the day, while the euro was up 0.06 per cent at $1.0975. The Australian dollar rose 0.08 per cent to $0.6623.

Source: Reuters

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Westpac

Economic

Central Bank

The RBA revised up its near-term inflation forecast in November and delivered one of the "one to two" rate increases assumed in their forecasts. Not enough new information has come to hand since then to warrant delivering a second increase just yet. The monthly CPI indicator is volatile, but the October reading was a bit below expectations. The RBA is still ready to raise rates further if it sees further upside surprises on inflation. It has no tolerance for more delays in the return to the inflation target. So February is still live, but we don't see them moving in December.

Today we reaffirm our view that the RBA is unlikely to raise the cash rate at its December meeting.

As described in the minutes of the November meeting, the staff forecasts were "predicated on there being an additional one to two increases in the cash rate over coming quarters". The peak in rates assumed in the forecasts is "around 4½ per cent" according to the RBA's latest Statement on Monetary Policy (SMP). One of these increases was already delivered following the November meeting. The question the RBA will be grappling with in coming months is what they need to see to turn one-and-a-half into two.

As outlined in Senior Economist Justin Smirk's note on the monthly CPI indicator yesterday, inflation in October in fact surprised a little on the downside. These data are noisy and neither the RBA nor we take full signal from a single monthly reading. Some of the biggest downside misses, such as for holiday travel, could reverse out. Moreover, most of the services components – which have been such a source of concern to the RBA – are not included in the first month of the quarter. We will not know how these are tracking until the November and December releases.

That said, there were some pleasing signs in prices of some goods. While the RBA has characterised the disinflation in goods prices as in line with its expectations, it is worth noting that the Bank's forecasts assume that global goods inflation declines as supply chains recover, but that global goods prices do not fall much in absolute terms. Indeed, the SMP has for the past several quarters briefly outlined a scenario where one-third of the pandemic-era run-up in prices does reverse. In that scenario, inflation returns to target next year, not in 2025. Given that producer price indices are in fact falling in a range of economies, there is a reasonable chance that this downside scenario plays out to some extent. The appreciation in the Australian dollar since the November meeting is also helpful in tempering the material upside risks to domestic inflation with a bit of downside risk around imported price inflation.

The other data released since the November Board meeting have also not provided enough of an upside signal to warrant moving in December. October retail sales were soft; unemployment and underemployment are drifting up as expected; and business surveys are pointing to price pressures easing from high levels. While employment growth was strong in the month, it has been volatile and affected by the rapid cycle in population growth. Measures expressed as ratios, such as the unemployment rate, participation rate and employment-to-population ratio, provide a better signal in these circumstances. These data have been playing out broadly in line with the RBA's forecasts. Together with the downward revision in the RBA's wages forecasts, we do not see an upside surprise on inflation – and so a reason for the RBA Board to move again this month – coming from this source.

Ahead of the October CPI release, RBA Governor Bullock had been strengthening the rhetoric about inflation risks. This could be construed as softening the public up for planned future rate increases. A more likely interpretation is that the Governor has been both seeking to explain the rate increase that has already occurred and signalling that further increases would occur if inflation were to decline more slowly than the RBA intends. As we have noted earlier, the RBA has been surprised on the high side by recent inflation data. If the Board really thought that further increases beyond November were a certainty, though, they would not have agreed to changing the language in the November media release, SMP and minutes to read "Whether further tightening of monetary policy is required…". This was a notable shift from the previous phrasing of "Some further tightening of monetary policy may be required".

By the time of the February meeting, the RBA will have the full December quarter inflation data as well as the September quarter national accounts and other key data. We reaffirm our view that the RBA Board would raise the cash rate at that meeting if it sees further upside surprises to inflation or fresh evidence suggesting that inflation will decline more slowly than it intends. If things play out broadly in line with their forecasts, though, further moves would be harder to justify. In that case, it would be likely that the RBA would hold the cash rate steady. Currently we believe this is the more likely outcome.

To stay updated on all economic events of today, please check out our Economic calendar

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