Ever since Prime Minister Abe's plans for economic and financial reform - 'Abenomics'- were put in place, there has been increased optimism towards financial assets.
Monetary and fiscal stimulus have supported rallies in the Nikkei and USD-JPY since November 2012 of 125% and 50%, respectively.
The sense of optimism is different this time. This is more than financial assets being supported by quantitative easing.
Standard Chartered (SC) research notes that there is a strong belief among local investors that things are changing in corporate Japan.
- Corporates are drawing down cash from their balance sheets and using it to fund overseas M&A. There is also an increased focus by corporate leaders on improving return on equity (ROE).
- If the objective of Abenomics is to change the mindset of consumers and corporates, it seems that the corporates are listening and ready to act.
- If local investor optimism was focused on USD-JPY in December, investors are currently focusing all of their domestic interests on local equities.
- The shift in investor positioning is reflected in the change in correlation between USD-JPY and the Nikkei.
- As recently as February, the 30-day rolling correlation between the two markets was as high as 0.60, but has fallen to marginally negative levels.
- In addition to increased optimism about corporate behaviour, there is increased confidence in corporate profitability.
SC adds that investors highlighted improvements in earnings as well as profit margins.
