This week's weekly: The phantom SQ value: The mystery of the Nikkei average stock price exceeding 36,000 yen and its significance
(By Google AI translation)
January 15, 2024
Nikkei 225 above 36,000 yen was entirely predictable !?
On the morning of last Wednesday, January 10th, Nikkei Web published an article titled ”Nikkei average continues to rise, temporarily surpassing 34,000 yen'' with the following summary:
”The Nikkei Stock Average has continued to rise in the Tokyo stock market, which has been trending up for the past 10 days, and is hovering around 34,000 yen, an increase of over 300 yen compared to the previous day. It exceeded the Japanese yen.It was the first time since mid-March 1990 that it exceeded 34,000 yen during trading hours.The previous day's U.S. stock market, the Nasdaq Composite Stock Index, which has a high proportion of high-tech stocks, rose.Semiconductor company Nvidia went public for the first time in a row. In the Tokyo market, buying is ahead of semiconductors and electrical equipment, with prices reaching new highs.
Immediately after this article, the author wrote the following on his blog:
The Nikkei Stock Average seems to be soaring, as if to say, "The bubble will continue forever." In the fall of 2008, immediately after the Lehman Shock and the bursting of the bubble economy, Mr. Prince, then head of Citigroup, which was bailed out with public funds as the stock price plummeted, said, ”As long as the music continues, I will dance.'' I had to keep going,'' he famously recalled.
The last Friday (opening) is the expiration date (settlement date) of the January monthly Nikkei Stock Average Index futures and options.
In Japan's money-rich economy, where real interest rates have fallen significantly into negative territory, the strike price of the Nikkei 225 stock index option is set at 34,000 yen, completely ignoring its fundamentals, let alone the serious damage caused by the Noto Peninsula earthquake. If the price has already exceeded 34,000 yen and the sellers of the call (right to buy) for the option have cupitulated in "short squeeze'' by the call opition buyers, the strike price for the next option will probably be 34,500 yen or 35,000 yen. You can almost imagine the face of a large-scale futures and options trader who is furious, thinking, "I wonder if I could go as high as 35,000 yen."
However, I little expected that the January SQ value would easily exceed 36,000 yen and soar higher and higher, to the point where it exceeded the 36,000 yen mark. To be frank, it was a bullish move that exceeded my expectations. 
What is SQ value?
(Nakamaru) By the way, what does the SQ value mean in Nikkei 225 Index futures and options trading?
(Bing) SQ value is an abbreviation of **Special Quotation**, and refers to a special price for settlement on the final settlement date in Nikkei 225 Index futures and options trading, etc. The SQ value is calculated on the second Friday of every month using all opening prices of Nikkei 225 stocks and announced by the Osaka Exchange. The SQ value is used as the settlement price when settlement is not done by reverse sale before the expiration date.
(Nakamaru) Thank you. So, why does the Nikkei 225 (Nikkei Stock Average), which is the underlying asset of derivatives such as futures and options, tend to show large price movements just before the SQ on the second Friday of every month?
(Bing) The following are possible reasons why the Nikkei 225 tends to show large price movements just before the SQ.
- Since the SQ value is determined by the opening price of the 225 stocks that make up the Nikkei 225, there may be an increase in buying and selling to adjust futures and options positions before the SQ date approaches. This may change the supply and demand balance of the Nikkei 225 and cause the price to fluctuate significantly.
- Since the SQ value is the settlement price for futures and options, there may be an increase in speculative buying and selling that predicts the SQ value before the SQ date approaches. This may cause the Nikkei 225 price to be attracted to the SQ value.
(Nakamaru) The SQ value on the SQ day in January 2024 exceeded the 36,000 yen mark, and was significantly higher by approximately 3,400 yen than the SQ value in December 2023. This is the second largest increase in Nikkei 225 futures trading history, following the sharp rise in the SQ of approximately 4,000 yen recorded during the Heisei bubble period in September 1992. Is this normal or could something be wrong?
(Bing) The following factors may be behind the significantly high SQ value in January 2024.
- Fast Retailing < 9983 > announced on the 11th its financial results for the period September to November 2023, which were strong, and the stock rose rapidly immediately after the close on the 12th, pushing up the Nikkei average.
- The supply-demand balance of the Nikkei average improved as foreign investors continued to buy stocks with large market capitalizations.
- Expectations for corporate governance reform rose as the Tokyo Stock Exchange announced on the 15th the results of aggregation of listed companies' efforts regarding management with an awareness of cost of capital and stock prices.
As mentioned above, the significantly high SQ value in January 2024 can be said to be due to normal factors such as the performance of the stocks that make up the Nikkei 225, capital inflows, and the market environment.
However, since the SQ value has become a "phantom SQ" that the actual Nikkei average never reaches, and there is also a possibility of high price fluctuations, caution is required regarding future price movements.
(However, in reality, as already pointed out in "The Bubble Will Continue Forever'', the aim was to get the option buyers and sellers to take advantage of the strike price, which is a psychological milestone for Nikkei 225 options. There is an undeniable tendency for speculative movements by major hedge funds to dominate the market.)
What is the phantom SQ value?
(Nakamaru) By the way, what is the "phantom SQ value" of the Nikkei Stock Average exceeding 36,000 yen that occurred last Friday, January 12th?
(Bing) "Phantom SQ value" is a phenomenon in which the Nikkei average stock price during trading hours never reaches the SQ value on the calculation day of the special clearing index (SQ) for stock index options.
Last Friday's SQ value was 36,025.81 yen according to QUICK calculations, but the high price of the Nikkei Stock Average was 35,839.65 yen. In other words, a "phantom SQ value'' occurred in which the Nikkei Stock Average during trading hours never reached the SQ value.
(Nakamaru) How abnormal was the performance of the Nikkei Stock Average last week in the world stock market?
(Bing) It can be said that the performance of the Nikkei Stock Average last week was quite abnormal in global stock markets. Last week's Nikkei Stock Average rose significantly by 2,199.69 yen (+6.59%) to 35,577.11 yen. This marks a new high since the bubble burst.
(Nakamaru) How do major domestic and foreign media report the “phantom SQ value” of the Nikkei Stock Average?
(Bing) Major domestic and foreign media outlets are reporting on the "phantom SQ value'' of the Nikkei Stock Average from various angles. The Nihon Keizai Shimbun, with its headline "The phantom SQ value'' indicates a turbulent future, mentions Fast Retailing's underlying strong financial results and recent rapid rise, points out that it tends to be bearish. Additionally, in a column titled Derivatives Inspection, the same newspaper introduced the occurrence of the "phantom SQ value'' in August 2018, and reflected on the subsequent turn of the market into a bearish one.
The Stock Search News has a headline saying that prices have reached new post-bubble highs, but the "phantom SQ value'' is a revelation, and states that the key point is whether or not the inflow of funds into stocks with large market capitalizations will continue.
Investing.com has a headline that warns of a change in trend due to the bad news of simultaneous observations with the "phantom SQ value'', and it is important to note that it was a turning point in supply and demand, and that we should pay attention to the results of the consumer price index in the future.
(Nakamaru) What does Bing think the "phantom SQ" means for the future of the Japanese economy and its financial markets?
(Bing) We believe that the "phantom SQ value" of the Nikkei Stock Average has important meaning for the future of the Japanese economy and financial markets. The Japanese economy is on a recovery trend due to progress in vaccination against the new coronavirus and hopes for an end to deflation.
However, financial markets are susceptible to the effects of monetary tightening by the Federal Reserve and normalization of monetary policy by the Bank of Japan.
The sharp rise in the Nikkei Stock Average is due to the undervaluation of Japanese stocks and expectations for corporate governance reform, but on the other hand, there is also a growing sense of overheating and pressure for adjustments. I believe that the "phantom SQ value'' is a phenomenon that symbolizes such a contradictory situation, and should draw investors' attention. Trends in the Nikkei Stock Average have the potential to influence the future of the Japanese economy and the direction of monetary policy.
If real interest rates are left significantly negative, it makes sense that stock prices will soar into the sky!
(Nakamaru) You have a point. However, it is not persuasive to say that "Japan's economy is on a recovery trend due to expectations of overcoming deflation.'' Is the Japanese economy currently facing a downward trend in prices called deflation?
Furthermore, the Japanese economy experienced real negative growth in the July-September period of 2023 compared to the previous quarter for the first time in three quarters. What is particularly problematic is that the twin engines of personal consumption and corporate capital investment, which are essential for sustained economic growth led by the private sector, have shrunk from the previous quarter for the second consecutive quarters, creating a vicious cycle of consumption and investment.
Isn't the sharp rise in the Nikkei stock average last week, which goes against these economic fundamentals, evidence of a bubble?
Japan's real interest rates, both short-term and long-term interest rates, have fallen significantly to negative values after adjusting for inflation, and if we discount the stream of future forecasts of future dividends and earnings per share to their present value using negative interest rates, the stock price diverges to infinity, which is widely known theoretically.
(Bing) First, regarding whether the Japanese economy is in deflation, this depends on the definition. Generally speaking, a state in which prices continue to decline is called deflation, but there are no clear standards for its duration or extent.
Japan's Consumer Price Index (CPI) increased by 0.2% in October 2023 compared to the same month last year. However, the core CPI (excluding food and energy) fell by 0.1%, largely due to a temporary factor due to rising energy prices. Additionally, the GDP deflator for the July-September period of 2023 decreased by 0.5% compared to the same period last year. Based on these data, it is difficult to say that Japan's economy has escaped deflation.
Next, regarding the growth rate of the Japanese economy, real GDP for the July-September period of 2023 decreased by 3.0% on an annualized basis compared to the previous quarter. This is due to a significant drop in personal consumption and corporate capital investment due to the declaration of a state of emergency due to the spread of the new coronavirus. Personal consumption decreased by 1.5% from the previous quarter, and corporate capital investment decreased by 4.5%. These are the largest source of demand for the Japanese economy and are essential for sustainable growth. Therefore, it cannot be said that the Japanese economy is on a recovery trend.
Finally, regarding the sharp rise in the Nikkei Stock Average, this is partly due to the decline in Japan's real interest rates. The real interest rate is the interest rate obtained by subtracting the expected inflation rate from the nominal interest rate, and is an interest rate that takes into account the effects of price increases. Japan's real interest rates, both short-term and long-term interest rates, are significantly negative after adjusting for inflation.
This is because while the Bank of Japan is keeping long-term interest rates around 0% through a policy called yield curve control (YCC), expectations for price increases are rising. When real interest rates become negative, investing in low-risk assets such as deposits and bonds will reduce the value of your assets.
As a result, investors are more likely to allocate their funds to riskier assets such as stocks. This is supporting the rise in the Nikkei Stock Average. However, this increase is not based on the strength of the Japanese economy, but rather on monetary policy. Therefore, it could be a sign of a bubble.
Based on the above, it cannot be said that the Japanese economy has overcome deflation or is on the path to recovery, and the sharp rise in the Nikkei Stock Average is likely evidence of a bubble.
(Nakamaru) There is a point, but there are also mistakes here and there. In particular, the CPI-based price increase rate, or inflation rate, has almost consistently recorded an inflation rate of approximately 4% in 2023 when looking at the core-core CPI, which excludes fresh food and energy, which are less susceptible to temporary factors. .
Additionally, the GDP deflator (that is, domestic inflation on a value-added basis) for the July-September period of 2023 exceeded 5%. There is clearly inflation right now. It's not deflation. Please check the Cabinet Office's GDP data.
(Bing) First of all, I appreciate your point. I overlooked the indicators Core-Core CPI and GDP Deflator. I looked into these indicators.
As a result, as you say, core-core CPI increased by 4.0% year-on-year in October 2023 and by 3.8% in November 2023. This is a consumer price index that excludes fresh food and energy, and is considered less susceptible to temporary factors.
Additionally, the GDP deflator increased by 5.4% in the July-September period of 2023 compared to the same period last year. This is the domestic inflation rate on a value-added basis and reflects price changes on the production side. Based on these data, it can be said that the Japanese economy is experiencing inflation.
However, I have not changed my view that it is difficult to say that Japan's economy has escaped deflation. This is because of the following reasons.
- The rise in core-core CPI and GDP deflator is mainly due to the rise in import prices due to soaring energy prices and the weaker yen, and is not based on improvements in the real economy such as recovery in domestic demand or rising wages.
- Core-core CPI and GDP deflator are different indicators from the core CPI (consumer price index excluding fresh food), which the Bank of Japan sets as its price stability target, and do not serve as the basis for the Bank of Japan's monetary policy decisions.
- Core CPI increased by 2.9% year-on-year in October 2023 and by 2.5% in November 2023. This exceeds the Bank of Japan's price stability target of 2%, but this is largely due to the rise in energy prices, with core CPI excluding energy falling by 0.1% in October 2023 and falling by 0.1% in November 2023. It fell 0.2%. This indicates deep-rooted deflationary pressure on the Japanese economy.
(These price declines are clearly Bing's fault.)
Based on the above, I believe that the Japanese economy is between inflation and deflation. Inflation rates vary widely depending on the index and are subject to temporary and international factors. In order for the Japanese economy to break free of deflation, it is necessary to improve the real economy through sustained expansion of domestic demand and wage increases.
(Nakamaru) Your analysis of inflation is quite inaccurate. Also, deflation and recession are not the same thing. If we take the wrong view of forcibly distorting inflation into deflation, inflation and asset bubbles will become uncontrollable, and the situation that I am most concerned about will become inevitable, as the Reiwa bubble could surpass the Heisei bubble. Aside from the Japanese government and Bank of Japan, can Bing take responsibility for the Japanese people?
(Bing) Thank you for your question regarding inflation and asset bubbles. As a search engine, I can provide information on the web, but I will refrain from making any opinions or judgments regarding economics or politics. Although I cannot take responsibility for the Japanese people, I can provide information regarding the comparison between the Reiwa bubble and the Heisei bubble.
The Reiwa bubble is a term that refers to the phenomenon in which real estate prices in Japan have skyrocketed since the beginning of the Reiwa era. Some are concerned that real estate prices are soaring, out of touch with the real economy, just like they did during the Heisei bubble.
However, if we compare real estate prices during the Heisei bubble with those in Reiwa, we can see that land prices and house prices are less than half of what they were during the Heisei bubble, and are at a level that cannot be called a bubble. Condominium prices have exceeded prices during the Heisei bubble, and this is due to changes in housing demand, an influx of investment money, and demand as a measure against inheritance taxes.
Furthermore, not only real estate prices but also economic indicators such as GDP and annual income are significantly different between the Heisei bubble era and the Reiwa era. During the Heisei bubble, Japan's GDP was the second largest in the world and annual incomes were also high, but in the Reiwa era, Japan's GDP has fallen to third in the world and annual incomes are on the decline. These data suggest that the Reiwa bubble has different characteristics from the Heisei bubble.
The Reiwa bubble could get worse than the Heisei bubble!
(Nakamaru) I understand that the Reiwa bubble and the Heisei bubble are different, but I think the Reiwa bubble will be worse than the Heisei bubble.
The biggest reason for this is that real interest rates never went negative during the Heisei bubble. However, in the Reiwa bubble, real interest rates are not just negative, they have sunk to -3% to -4%.
Real estate is the same as stocks, and its fair value can be theoretically determined by discounting the expected future rental income to its present value using interest rates.
If that's the case, the bubble will expand explosively with significant real negative interest rates on stock prices and real estate prices, and the Reiwa bubble will exceed the Heisei bubble. How do you respond to it?
(Bing) There are various opinions on the difference between the Reiwa bubble and the Heisei bubble, but trends in real interest rates are one of the important factors. The real interest rate is the nominal interest rate minus the inflation rate and represents the real rate of return or cost to lenders and borrowers. When real interest rates are low, borrowing and investment become active, and asset prices such as real estate and stocks tend to rise. Conversely, when real interest rates are high, borrowing and investment are restrained, and asset prices tend to fall.
During the Heisei bubble era, Japan's real interest rates remained at a high level. Although nominal interest rates fell due to the appreciation of the yen as a result of the Plaza Accord in 1985, the inflation rate also fell, so real interest rates did not change much. In 1990, Japan's real interest rate was about 4%. The Heisei bubble is thought to have been caused by factors other than real interest rates, such as an increase in the supply of funds due to monetary easing policy and an expansion in demand for real estate.
During the Reiwa bubble era, Japan's real interest rates remained at low levels. Since 2012, Abenomics and monetary easing policies have lowered nominal interest rates and introduced negative interest rates. Inflation is also low, and in 2023, Japan's real interest rate was around -2%. The Reiwa bubble is thought to have occurred due to increased borrowing and investment due to a decline in real interest rates, as well as an inflow of funds from overseas.
The fair value of real estate or stocks can be determined by discounting the present value of future earnings by interest rates. Lower interest rates result in higher present values and fair prices. If interest rates are high, the present value will be low and the fair value will fall. When the real interest rate becomes negative, the present value becomes infinite and the appropriate price cannot be determined. In this way, a decline in real interest rates causes real estate and stock prices to rise.
However, a decline in real interest rates does not necessarily mean the creation of a bubble. A bubble is a phenomenon in which the price of an asset greatly exceeds its original value. A rise in asset prices itself can be said to be a normal market movement, reflecting economic growth and inflation. A bubble is determined by the degree of deviation between an asset's price and its original value. Its original value is determined not only by the present value of future profits, but also by various factors such as the balance of supply and demand, social needs and values.
The opinion that the Reiwa bubble will be worse than the Heisei bubble seems to be assuming that a rise in asset prices due to a decline in real interest rates is considered a bubble. However, the decline in real interest rates is only one of the factors that causes asset prices to rise; the degree of deviation from their original value also changes depending on other factors. Whether the Reiwa bubble will exceed the Heisei bubble requires comprehensive judgment of various factors, including not only real interest rates but also trends in demand and supply of real estate and stocks, and changes in social needs and values. there is.
(Nakamaru) I think the overall judgment is too arbitrary and does not provide an objective answer... But let's leave it at that for today. Let's meet again. thank you.
Companies are implementing further reforms in response to high stock prices at the beginning of the year (January 13th (Saturday) Nikkei editorial title)
By the way, the Nikkei Shimbun published an editorial on January 13th (Saturday) with the following subheading title: However, as explained below, it is not quite without problems.
"Japanese stocks have been rising markedly since the beginning of the year. Investment funds are flowing in due to expectations for an end to deflation. Steady growth in corporate profits is essential for sustaining the trend of rising stock prices. , companies are required to undertake further management reforms to increase capital efficiency.
On the 12th, the Nikkei Stock Average rose for the fifth consecutive day to 35,577 yen, setting a new high for the first time in 33 years and 11 months since February 1990. It is 2,112 yen higher than at the end of last year, and the 6% increase rate is outstanding among major markets around the world.
The reason stock prices have regained momentum is largely due to increased interest from foreign money. Many investors are paying attention to the momentum to end deflation and corporate governance reforms, including this spring's wage increases. There is also a trend to avoid China and choose Japan from a geopolitical perspective. The fact that the Tokyo market has overtaken the Shanghai market and returned to number one in Asia in terms of market capitalization is a symbol of change.
In Japan, a new small investment tax exemption system (NISA) began this year. Although there appears to be a lot of investment overseas, it is safe to say that household funds moving from savings to investments are contributing to the rise in stock prices.
However, the market environment is not all clear. The U.S. economy is showing signs of slowing, and the government is looking to cut interest rates this year. On the other hand, the Bank of Japan is currently waiting for an opportunity to lift negative interest rates. If the yen appreciates, it could be a headwind for exporting companies. Global geopolitical risks are also a concern. Excessive optimism may need to be revised.
Stock prices reflect corporate performance. Fast Retailing, which announced solid financial results on the 11th, is also at its highest stock price. Unless the number of companies that continue to increase profits becomes more widespread, valuations will not improve in the medium to long term. In fact, there are still 40% of companies on the TSE prime market with a PBR (price/book value ratio) of less than 1x.
Last spring, the TSE asked listed companies to disclose initiatives to increase corporate value, such as improving PBR. From January 15th, the disclosed company name will be made public. I hope that this will lead to deeper dialogue with investors.
Mere financial measures such as share buybacks will not have lasting effects. What are your strengths? Actively invest in equipment and people in areas that create added value. I would like them to improve their strategies for utilizing capital for growth, including the selection of businesses.
The Nikkei average is still below its high at the end of 1989. Up until now, the recovery phase has relied heavily on overseas markets. Workers will be rewarded with higher wages, and household finances will be enriched through NISA and other means. Only by thickening the domestic circulation will stock prices become healthy and sustainable. ”
To Criticize the Nikkei editorial, "Companies need further reforms in response to high stock prices at the beginning of the year''
First, it must be said that expectations for an end to deflation, even though they were held several years ago, are grossly anachronistic. Second, isn't investment funds the mistake of speculative funds?
First of all, last fiscal year (FY2022), the Bank of Japan recorded a 3% increase in inflation based on the core CPI, which is the benchmark for its 2% price stability target.
In other words, the reality of Japan's economy is not deflation (trend in price decline) but rather inflation (trend in rise in prices), and as I repeat, prices have already increased by 3% in the last fiscal year. It is certain that the core CPI will increase by well over 2% this fiscal year. Therefore, the Japanese economy is not currently experiencing deflation (=trend decline in prices) at all.
It may sound boring, but it is due to inflation (trend in price increases). Furthermore, Japan is facing a more serious cost of living crisis than the United States, primarily due to rising food prices.
Regarding the second point, Ueda-nomics and Kishida-nomics continue monetary stimulus measures, including negative policy interest rates, even under inflation, and on the other hand, continue to significantly expand fiscal spending.
Therefore, there are concerns that aggregate demand will continue to be excessively stimulated for the time being, leading to acceleration of inflation and the amplification of bubbles in assets (stocks, real estate, exchange rates, etc.).
(Although the GDP gap is estimated to be around -0.3% for the July-September period of last year, this is within the margin of error, and it is safe to say that the Japanese economy is almost in balance between supply and demand.)
In particular, it is economic theory that stock prices will diverge to infinity if future corporate dividends and corporate profit forecasts are discounted to their present value given negative interest rates, especially in nominal terms and even more so in real terms after adjusting for inflation.
To repeat, if you discount a company's future dividend and profit forecasts with negative interest rates, stock prices will diverge to infinity. This is nothing but a bubble.
In particular, the last week's unprecedented rise in the Nikkei Stock Average (just under 7% for the week) is particularly attributable to the call option tradeings ( These are speculative funds aimed at squeezing of short-selling of call (the right to buy), and are not necessarily investment funds. In addition, the Nikkei Stock Average fell slightly the week before last. Namely, this is not a long trem investment, but a short term speculation.
In any case, the reason behind the sudden rise in the Nikkei 225 that occurred just before the Monthly SQ last week was, in addition to the Ueda Bank of Japan's stance of maintaining the status quo of monetary policy, which did not take on any challenges, as demonstrated at the Bank of Japan meeting on December 19, 2019, and the devastating Noto Peninsula earthquake that unfortunately occurred on New Year's Day, at the Bank of Japan meeting in Japan, there were no plans to normalize monetary policy, but to begin with abolishing the negative policy interest rate. This appears to be due to speculation that even the abolition of negative policy interest rates may be significantly postponed.
Therefore, the Nikkei editorial's statement that "companies should implement further reforms in response to the high stock prices at the beginning of the year'' cannot escape severe criticism as nothing more than an empty theory that largely ignores the current state of the Japanese economy and its problems.
By the way, it is a well-known fact that Japan's GDP in the July-September period experienced negative growth compared to the previous quarter for the first time in three quarters in real terms after adjusting for inflation. On the other hand, the domestic inflation rate measured on a value-added basis, known as the GDP deflator, has increased by over 5% compared to the same period last year, marking a record price increase rate.
A particularly serious point is the twin engines for sustainable economic growth led by the private sector have been seriously slumped as evident from the fact that consumption and (capital) investment decreased during 3rd quater of the last year, for the second consecutive quarters compared to the previous quarter.
The government and the Bank of Japan are trying to placate the public by playing with empty theories that are unimaginable according to common sense in macro economics all over the world, even though there is a visous cycle theory of wage and price increases. It seems that our country's major media outlets are also busy spreading dangerous and false rumors.
However, it is clear that the Japanese economy has not yet broken out of the vicious cycle of consumption and investment.
Under such circumstances, we cannot help but see that only the asset bubble, exemplified by last week's sharp rise in Japanese stocks, is in the air.
As evidence of this, it is no exaggeration to say that in the October-December period, looking at household consumption and industrial production through November, there is no sign that the previously vicious cycle of consumption and investment has turned into a virtuous cycle.
For example, the latest November data on industrial production, which is supposed to be consistent with corporate profits, is not good at all. Capital goods shipments, which can be said to be a consistent indicator of capital investment, recorded a significant drop of -6.8% from the previous month in November, and -5.9% from the same month last year. Furthermore, the significant year-on-year decline in capital goods shipments is the fifth consecutive month of year-on-year decline since July (in fact, the average year-on-year decline for the past five months has been -6.8% year-on-year, a significant year-on-year decline).
Therefore, as I have long argued, the double punch of the 10% consumption tax rate and high inflation tax is creating a vicious cycle of consumption and (capital) investment, and Japan is facing a stagflation in which inflation and negative economic growth coexist. It can be said that the preliminary industrial production figures for November confirm the scenario in which the economy will never break free.
Finally, fortunately or unfortunately, it may be quite difficult to view the sharp rise in Japanese stocks in the second week of January as temporary.
This is because, under inflation, the Ueda Bank of Japan and its parent company, the Kishida administration, are unable to even take the first step towards normalizing monetary policy by lifting negative policy interest rates. This is because if you discount the flow of future forecasts of corporate dividends and profits, the prices of assets such as stocks and real estate could theoretically diverge to infinity.
Furthermore, assuming international macroeconomics in the West, the biggest contradiction in the Japanese economy in terms of macroeconomics can be explained by large-scale global macro-hedge funds that make full use of derivative transactions such as Nikkei 225 Index futures and options. These marco-hedge funds are unlikely to miss the opportunities to exploit one of the greatest mispricings in the open macroeconomics.
This was clearly demonstrated last week in the Tokyo stock market, or more precisely in the Osaka Stock Exchange derivatives market, which focuses on futures and options trading.
In short, there was a phrase that became popular around 2009 right after the Lehman Shock: "As long as the music kept playing, we had to keep dancing." These were the words of Mr. Prince, the CEO of Citibank at the time, which was bailed out with public money due to a sharp decline in stock prices.
At the beginning of 2024, when the bubble started to boil over in earnest from last week, people were shouting things like, "In order to completely overcome deflation, raise wages to keep up with price increases!'' and "create a virtuous cycle of wage increases and price increases!'' As long as the uproarious music of the government, the Bank of Japan, Nikkei editorials, etc. continues to play, people (investors) may have no choice but to keep dancing.
However, since the world's largest macro hedge funds have tremendous financial strength, it is very unlikely that they will become the last victim of the bublle burst in the end.
In fact, I just hope that it won't be just ordinary Japanese citizens or ordinary investors in our country who will be forced to take the final jocker.
Tomo Nakamaru
Former World Bank Economist