Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

<p>As noted in the last insight about <a href="https://www.smartkarma.com/insights/the-gpif-s-new-policy-mix" target="_blank" data-smartkarma-citation="insights:38000" rel="noopener">The GPIF's New Policy Mix</a> (and its preceding <a href="https://www.smartkarma.com/insights/gpif-policy-mix-changes-ride-to-global-risk-rescue" target="_blank" data-smartkarma-citation="insights:37770" rel="noopener">GPIF Policy Mix Changes Ride to Global Risk Rescue</a>), the GPIF has changed its policy mix.</p><p>Apparently, going to <em>exactly</em><em>25% each</em>, <em>plus or minus a fair bit</em>, on domestic bonds, foreign bonds, domestic equities, and foreign equities, provides the lowest risk profile while reaching the GPIF's real investment rate of return target of 1.7%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/617/original/Screenshot%202020-04-12%20at%206.31.04%20PM.png?1586687503" class="editor-image img-responsive" data-smartkarma-image-id="127617"></figure><div class="content-highlight">
<p>This is the target for the future. A target which it will meet. With 50%, or roughly 40% to up to 60+% of notional, and far more than that of mark-to-market risk, in foreign currency.</p>
<p>And that is the lowest risk portfolio tested. </p>
<p>How do we know they will meet that target? Because they backtested the policy mix over the past 25yrs post-bubble returns to March 2019. Using annual data. It was also tested against the last 34yrs of returns. Using annual data. And everyone knows that using 25-34 data points over the past 25-34 years is likely to provide near certainty of what will happen to yen returns in foreign currency assets. [narrator: no, it won't].</p>
<p>As of the start of this new policy on 1 April, the yen-hedged 10yr US Treasury rate was about -0.6% rather than the average 4.1% yield over 25yrs less a yen hedge to get to 2.6%. </p>
<p>The current prospective yen-hedged return is 3.2% below the bogey rate of 2.6% in yen. To get back to a yen-hedged rate of 2.6%, the entire GPIF portfolio has to take a loss of something like 7-8% at the policy mix of 25% foreign bonds. Either that or they can hold on to the bonds they have and expect USD/JPY to rise 2% a year to get to ¥130 to the dollar by March 2030.</p>
<p>But that is the base assumption. USD/JPY has to go up 2% a year to make this work.</p>
<p>Practically speaking, of course, that might not be required. If USD/yen rose and bond yields rose in the interim, the domestic equities portfolio might outperform the expected 5.6% annual return and make up for the interim losses, and income from the equity portfolio could be used to reinvest a larger amount at higher yields. The assumed correlation between the two assets in yen terms is close to zero. </p>
<p>But all that requires aggressive rebalancing when the yen-denominated asset portfolios get out of whack with the policy mix rates. </p>
</div><p>All this should tell you is that the policy mix as it was when they decided this in March was substantially different than the history which informed the decision (markets move, who'da thunk?), and the result is that to match that return going forward, the yen has to weaken substantially, and consistently, and effectively permanently. That's the base investment case.</p><h2>The Other News Out From the GPIF is About ESG</h2><p>The <a href="https://www.gpif.go.jp/topics/Adoption%20of%20New%20Policy%20Portfolio_Jp_details.pdf" target="_blank" rel="noopener">presentation</a> (only in Japanese) about the change in policy makes considerable mention of the concept of ESG and stewardship, and suggests an interesting breakdown of what stewardship means for passive investing and active investing conducted by the GPIF's sub-managers. The minutes of the last several Investment Committee and Governors' meetings also refer quite a lot to ESG. </p><p>The presentation and minutes also talk quite interestingly about index construction and engagement with index providers. </p><p>The result is an increased emphasis on </p><h2>And We Have March Data And May Glean What GPIF Did in FYQ4</h2><p>Late last week, the Japanese Ministry of Finance reported its survey of large asset managers and trust banks of the flows in international securities, and the TSE reported the weekly and therefore March totals for trust bank activity in equities.</p><p>The picture painted may tell us something remarkable about what happened in the last quarter. </p><p>Much more below.</p>

As noted in the last insight about The GPIF's New Policy Mix (and its preceding GPIF Policy Mix Changes Ride to Global Risk Rescue), the GPIF has changed its policy mix.Apparently, going to exactly25% each, plus or minus a fair bit, on domestic bonds, foreign bonds, domestic equities, and foreign equities, provides the lowest risk profile while reaching the GPIF's real investment rate of return target of 1.7%.
This is the target for the future. A target which it will meet. With 50%, or roughly 40% to up to 60+% of notional, and far more than that of mark-to-market risk, in foreign currency.
And that is the lowest risk portfolio tested. 
How do we know they will meet that target? Because they backtested the policy mix over the past 25yrs post-bubble returns to March 2019. Using annual data. It was also tested against the last 34yrs of returns. Using annual data. And everyone knows that using 25-34 data points over the past 25-34 years is likely to provide near certainty of what will happen to yen returns in foreign currency assets. [narrator: no, it won't].
As of the start of this new policy on 1 April, the yen-hedged 10yr US Treasury rate was about -0.6% rather than the average 4.1% yield over 25yrs less a yen hedge to get to 2.6%. 
The current prospective yen-hedged return is 3.2% below the bogey rate of 2.6% in yen. To get back to a yen-hedged rate of 2.6%, the entire GPIF portfolio has to take a loss of something like 7-8% at the policy mix of 25% foreign bonds. Either that or they can hold on to the bonds they have and expect USD/JPY to rise 2% a year to get to ¥130 to the dollar by March 2030.
But that is the base assumption. USD/JPY has to go up 2% a year to make this work.
Practically speaking, of course, that might not be required. If USD/yen rose and bond yields rose in the interim, the domestic equities portfolio might outperform the expected 5.6% annual return and make up for the interim losses, and income from the equity portfolio could be used to reinvest a larger amount at higher yields. The assumed correlation between the two assets in yen terms is close to zero. 
But all that requires aggressive rebalancing when the yen-denominated asset portfolios get out of whack with the policy mix rates. 
All this should tell you is that the policy mix as it was when they decided this in March was substantially different than the history which informed the decision (markets move, who'da thunk?), and the result is that to match that return going forward, the yen has to weaken substantially, and consistently, and effectively permanently. That's the base investment case.The Other News Out From the GPIF is About ESGThe presentation (only in Japanese) about the change in policy makes considerable mention of the concept of ESG and stewardship, and suggests an interesting breakdown of what stewardship means for passive investing and active investing conducted by the GPIF's sub-managers. The minutes of the last several Investment Committee and Governors' meetings also refer quite a lot to ESG. The presentation and minutes also talk quite interestingly about index construction and engagement with index providers. The result is an increased emphasis on And We Have March Data And May Glean What GPIF Did in FYQ4Late last week, the Japanese Ministry of Finance reported its survey of large asset managers and trust banks of the flows in international securities, and the TSE reported the weekly and therefore March totals for trust bank activity in equities.The picture painted may tell us something remarkable about what happened in the last quarter. Much more below.

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The short notional in the market for the data released 7 April is US$33.02bn (up by US$1,509mm excluding FX movements and ETFs) with the largest short positions in <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a>.</p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a> and <a href="https://www.smartkarma.com/entities/nitta-gelatin-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1481:1">Nitta Gelatin (4977 JP)</a> <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:8244:1"></a>while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/nitta-gelatin-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1481:1">Nitta Gelatin (4977 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a>, <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a> and <a href="https://www.smartkarma.com/entities/yumeshin-holdings-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:12939:1">Yumeshin Holdings (2362 JP)</a>.</p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:27445:1">Softbank Corp (9434 JP)</a>, <a href="https://www.smartkarma.com/entities/chugai-pharmaceutical-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a> and <a href="https://www.smartkarma.com/entities/yaskawa-electric-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:2458:1">Yaskawa Electric (6506 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:12933:1">Kao Corp (4452 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a>, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:13316:1">M3 Inc (2413 JP)</a> and <a href="https://www.smartkarma.com/entities/trend-micro-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:13172:1">Trend Micro Inc (4704 JP)</a>.</p></div><div><p>Sectorally, short positions increased in all sectors led by Information Technology (US$345m), Communication Services (US$324m), Industrials (US$264m), Materials (US$154m) and Consumer Discretionary (US$153m).</p></div>

The short notional in the market for the data released 7 April is US$33.02bn (up by US$1,509mm excluding FX movements and ETFs) with the largest short positions in Fast Retailing (9983 JP), Itochu Corp (8001 JP), Canon Inc (7751 JP), Toyota Motor (7203 JP) and Shiseido Co Ltd (4911 JP).Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Aruhi Corp (7198 JP), Taiyo Yuden (6976 JP) and Nitta Gelatin (4977 JP) while the stocks with the highest days to cover are Nitta Gelatin (4977 JP), Aruhi Corp (7198 JP), Vital Ksk Holdings (3151 JP), Katakura Industries (3001 JP) and Yumeshin Holdings (2362 JP).The largest increases in short notional over the week were Canon Inc (7751 JP), Softbank Corp (9434 JP), Chugai Pharmaceutical (4519 JP) and Yaskawa Electric (6506 JP) while shorts were covered in Kao Corp (4452 JP), Subaru Corp (7270 JP), M3 Inc (2413 JP) and Trend Micro Inc (4704 JP).Sectorally, short positions increased in all sectors led by Information Technology (US$345m), Communication Services (US$324m), Industrials (US$264m), Materials (US$154m) and Consumer Discretionary (US$153m).

The Big Short: All Sectors See An Increase

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/362/original/File%202020-04-04%208%2045%2047.jpeg?1585957595" class="editor-image img-responsive" data-smartkarma-image-id="126362"></figure><div class="content-caption">Source • stopcovid19.jp</div><p><strong>OVERSHOOT</strong> - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's response to COVID-19. The English-language word 'overshoot' is used widely in Japan to refer to the situation in which more than 100% of available intensive care hospital beds are in use. Although the occupancy rate for Japan is still only 48%, Kyoto and Kanagawa Prefectures are already in 'overshoot', and Tokyo is again close to being so even after increasing capacity by 50% this week. As can be seen above, the country has sufficient ventilator capacity to deal with ten times the current cases (28,197); the shortage is in hospital beds for infectious diseases (4,089). The Tokyo Metropolitan Government (TMG) is now aiming to secure over 4,000 beds for severe COVID-19 cases, including 3,300 with oxygen. Of the 635 patients currently hospitalised in the capital, 80% do not need intensive care. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/377/original/IMG_1102.jpg?1585958777" class="editor-image img-responsive" data-smartkarma-image-id="126377"></figure><div class="content-caption">Source • NHK</div><p><strong>REGIME CHANGE</strong> - As we have noted in an earlier <a href="https://www.smartkarma.com/insights/japan-market-update-hit-the-boj-bid-and-wait-for-the-absolute-value-opportunity" target="_blank" data-smartkarma-citation="insights:37670" rel="noopener">Insight</a>, Japan has been slow to increase testing for COVID-19 as there was a Health Ministry guideline that all positive cases were to be hospitalised however mild the symptoms. Large-scale testing would result in the healthcare system being overwhelmed by a large number of relatively-mild cases. Also, the social convention of avoiding '<em>meiwaku</em>' or trouble to others has resulted in many of those with symptoms avoiding seeking confirmation. The Ministry is also resisting the designation of deaths from pneumonia as related to COVID-19 and is refusing to release data on the number of pneumonia deaths which are rumoured to be 'significantly higher' than in previous years in Tokyo. Whether by design or neglect, Japan lulled itself into a false sense of 'corona-superiority' which has delayed many of the responses that other developed countries have been taking. In the face of increased pressure from the medical profession, the bureaucrats have now relented and, at least in Tokyo, less-severe cases will be able to stay at home or will be billeted in hotels. The rule that patients could only be released from the hospital after two negative tests is also to be 'relaxed'. The rule that new cases must be reported to the Ministry by fax still, however, remains in place.</p><p><strong>HOTELS &amp; HOMES</strong> - Given the size of most homes in the capital, isolation in homes with multiple residents will be hazardous, The TMG is, therefore, moving quickly to requisition or acquire the necessary hotel space.  The infamously-xenophobic APA Hotel chain has been quick to offer their services to lightly-symptomatic patients and is offering a 50% discount to health care workers.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/380/original/2020-04-04_10-51-38.png?1585965120" class="editor-image img-responsive" data-smartkarma-image-id="126380"></figure><div class="content-caption">Source outbreak.info</div><p><strong>ASIAN OUTLIER</strong> - Japan is now the outlier in Asia in seeing an increasing rate of daily new cases (353 on April 3rd),  including a six-month-old baby against whom medical staff did not think to take any precautions forcing 44 staff into two weeks of self-isolation. Using a simple measure proposed by Messrs <a href="https://medium.com/@ekohlberg_47501/a-simple-score-to-tell-if-we-are-beating-the-virus-49e74b707e35" target="_blank" rel="noopener">Kohlberg, Neyman, and Tepper</a>, Japan's R Score is 2.09. With both Singapore and Hong Kong introducing stricter social constraints over the last two days, Japan's Swedish-style response is facing increasing domestic criticism. Several LDP politicians and supporters have distanced themselves from PM Abe's two-masks policy. Although far from disinterested parties, <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>'s @hmikitani and <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>'s @masason have both taken to Twitter to urge for the declaration of a state of emergency. The former has however been slow to prevent price-gouging for masks sold on the Rakuten platform. Even the influential Keidanren business federation has now accepted that a state of emergency is 'acceptable' on condition that 'vital services' are not too severely disrupted.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/396/original/File%202020-04-03%2019%2016%2000.jpeg?1585974026" class="editor-image img-responsive" data-smartkarma-image-id="126396"></figure><div class="content-caption">Source • NHK</div><p><strong>TOKYO AT THE TIPPING POINT</strong> - Even the normally-quiescent NHK fired up their graphic team for last night's '7 NEWS'  to illustrate that Tokyo is 18 days away from an exponential explosion unless there is an 80% reduction in social activities. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/386/original/File%202020-04-04%200%2030%2052.jpeg?1585968614" class="editor-image img-responsive" data-smartkarma-image-id="126386"></figure><div class="content-caption">Source • NHK</div><p><strong>GOVERNOR KOIKE -</strong> Although firmly stating that a full lockdown of Tokyo is legally 'impossible', Gov. Koike is gently prodding the national government towards stricter measures and continues to warn businesses to make the necessary preparations as only grocery stores, bank and medical facilities would remain open. She has requested residents to stay at home this weekend and is recommending avoiding the three "<strong>C'</strong>s" - <strong>C</strong>rowded, <strong>C</strong>onfined spaces where <strong>C</strong>onversations take place until further notice. Taking a leaf from Governor Cuomo's book, she is now giving daily updates on YouTube, including one in English. Having harboured ambitions for higher office in the past, the contrast she is drawing with the apparently-hapless Prime Minister is being made abundantly clear. Many LDP officials, however, remain wary of her 'un-Japanese' opportunism and her authoritarian and unpredictable nature. As in the United States, personal and political rivalries are obstructing to sensible policy-making.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/387/original/2020-04-04_12-01-17.png?1585969302" class="editor-image img-responsive" data-smartkarma-image-id="126387"></figure><div class="content-caption">Source • Google</div><p><strong>PARTIAL LOCKDOWN</strong> - Many restaurant chains including <a href="https://www.smartkarma.com/entities/torikizoku-co-ltd" target="_blank" data-smartkarma-citation="entities:17718:1" rel="noopener">Torikizoku (3193 JP)</a>, <a href="https://www.smartkarma.com/entities/kushikatsu-tanaka-co" target="_blank" data-smartkarma-citation="entities:26733:1" rel="noopener">Kushikatsu Tanaka (3547 JP)</a>  and <a href="https://www.smartkarma.com/entities/hub-co-ltd" target="_blank" data-smartkarma-citation="entities:11892:1" rel="noopener">Hub (3030 JP)</a> and karaoke and entertainment facilities such as <a href="https://www.smartkarma.com/entities/daiichikosho-co-ltd" target="_blank" data-smartkarma-citation="entities:8629:1" rel="noopener">Daiichikosho (7458 JP)</a>, <a href="https://www.smartkarma.com/entities/koshidaka-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14191:1" rel="noopener">Koshidaka (2157 JP)</a> and <a href="https://www.smartkarma.com/entities/round-one-corp" target="_blank" data-smartkarma-citation="entities:7057:1" rel="noopener">Round One (4680 JP)</a> have announced the closure of their facilities for several weeks and join the department stores and cinemas that closed last and will be so again this weekend. Even the Spring Sumo tournament has been delayed for at least two weeks. As confirmed by Google's excellent Community Mobility Reports above, Tokyo is gradually heeding the call. The March Services PMI for Japan suggests a year-on-year contraction of 8%. The onus will now pass to the national government to mitigate the losses.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/397/original/2020-04-04_13-51-59.png?1585975942" class="editor-image img-responsive" data-smartkarma-image-id="126397"></figure><div class="content-caption">Source • US Embassy, Tokyo</div><p><strong>'GET-OUT-OF-EDO-BABY-GO'</strong> - The US Embassy in Japan is recommending that any US citizens who are not prepared to stay in Japan for several months or who are concerned about not being able to receive appropriate medical care should leave immediately. Those who do will, however, not be allowed to return for an as-yet-unspecified period.  Even Japanese nationals are now required to spend fourteen days in quarantine. All residence visas that expire before the end of June be extended by three months. From April 3rd and until further notice, non-Japanese of any residence status, including permanent and spouses of Japanese nationals, are to be denied re-entry if they leave Japan. Welcome to the lock-in without a lockdown!</p><p><strong>RELIEF MEASURES</strong> - A potpourri of relief measures and new policies are doing the rounds in government circles including some or all of the following:- </p><ul>
<li>
<strong>¥300,000 </strong>- A one-time non-taxable payment will be made to qualified households that are suffering financially from a loss of income. About 10 million households are expected to qualify. It has already been necessary to make clear that the adult entertainment industry will not be eligible for public funds. ¥300,000 is equivalent to the annual amount spent on a pet dog in Japan.</li>
<li>
<strong>PREFERENCE SHARES</strong> - Large firms such as airlines, shippers and auto manufacturers may be eligible for rescue packages in the form of preference shares issued to the Development Bank of Japan of up to ¥400 billion each. The allocation of such funds will be a subject of much political jostling, while smaller businesses that lack the right connections may not be deemed eligible. We would now be wary of being aggressively 'short' these sectors.</li>
<li>
<strong>FIVE-YEAR INTEREST-FREE LOANS</strong> - While a welcome measure for some SMEs, this measure may not be sufficient for those already-indebted businesses with large numbers of regular employees operating out of rented accommodation, of which Japan's legion of wholesalers is a prime example.</li>
<li>
<strong>TAX MORATORIA</strong> - The government is to grant a moratorium on tax payments by companies that have seen their monthly revenues fall by more than 20% from the previous year due to COVID-19.</li>
<li>
<strong>WRITE-DOWNS</strong> - The Japanese ASB and the FSA have announced that companies will be allowed greater leniency regarding asset writedowns for idle plants and stores</li>
<li>
<strong>SUBSIDIES</strong> - The government will fully-subsidise the increase in production of <a href="https://www.smartkarma.com/entities/fujifilm-holdings-corp" target="_blank" data-smartkarma-citation="entities:16353:1" rel="noopener">Fujifilm (4901 JP)</a>'s Avigan drug and ventilators from a variety of manufacturers. Avigan will be offered for free to other countries.</li>
<li>
<strong>DE-GLOBALISATION</strong> - <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a> are in talks with the Ministry of Economy, Trade and Industry to move some or all of their supply chains our of China. <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> is seemingly no longer considered relevant in this regard. Japanese corporates will also begin a process of unwinding unprofitable overseas operations to support their domestic activities, a move that will help keep the Yen relatively stable over the medium term.</li>
</ul><p>While large Japanse corporations are relatively well-placed to weather this storm, the Japanese government is fiscally constrained and grossly indebted relative to GDP. Given the now-inflationary global outlook, we would expect the Bank of Japan to be the least generous of the central banks in response to COVID-19, which will also be supportive of the Yen.</p><p>In the <strong>DETAIL</strong> section below, we shall review our targets for our Results and Revisions Scores, and the market overall, look at our updated trailing aggregate actual profits and multiples and review Fridays' Results and Revisions. Finally, we shall suggest that Japan is well-placed for the emergent post-COVID economic world order and conclude that we would be buyers of Japanse equities into the second wave of the COVID-19 downturn.</p>

Source • stopcovid19.jpOVERSHOOT - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's response to COVID-19. The English-language word 'overshoot' is used widely in Japan to refer to the situation in which more than 100% of available intensive care hospital beds are in use. Although the occupancy rate for Japan is still only 48%, Kyoto and Kanagawa Prefectures are already in 'overshoot', and Tokyo is again close to being so even after increasing capacity by 50% this week. As can be seen above, the country has sufficient ventilator capacity to deal with ten times the current cases (28,197); the shortage is in hospital beds for infectious diseases (4,089). The Tokyo Metropolitan Government (TMG) is now aiming to secure over 4,000 beds for severe COVID-19 cases, including 3,300 with oxygen. Of the 635 patients currently hospitalised in the capital, 80% do not need intensive care. Source • NHKREGIME CHANGE - As we have noted in an earlier Insight, Japan has been slow to increase testing for COVID-19 as there was a Health Ministry guideline that all positive cases were to be hospitalised however mild the symptoms. Large-scale testing would result in the healthcare system being overwhelmed by a large number of relatively-mild cases. Also, the social convention of avoiding 'meiwaku' or trouble to others has resulted in many of those with symptoms avoiding seeking confirmation. The Ministry is also resisting the designation of deaths from pneumonia as related to COVID-19 and is refusing to release data on the number of pneumonia deaths which are rumoured to be 'significantly higher' than in previous years in Tokyo. Whether by design or neglect, Japan lulled itself into a false sense of 'corona-superiority' which has delayed many of the responses that other developed countries have been taking. In the face of increased pressure from the medical profession, the bureaucrats have now relented and, at least in Tokyo, less-severe cases will be able to stay at home or will be billeted in hotels. The rule that patients could only be released from the hospital after two negative tests is also to be 'relaxed'. The rule that new cases must be reported to the Ministry by fax still, however, remains in place.HOTELS &amp; HOMES - Given the size of most homes in the capital, isolation in homes with multiple residents will be hazardous, The TMG is, therefore, moving quickly to requisition or acquire the necessary hotel space.  The infamously-xenophobic APA Hotel chain has been quick to offer their services to lightly-symptomatic patients and is offering a 50% discount to health care workers.Source outbreak.infoASIAN OUTLIER - Japan is now the outlier in Asia in seeing an increasing rate of daily new cases (353 on April 3rd),  including a six-month-old baby against whom medical staff did not think to take any precautions forcing 44 staff into two weeks of self-isolation. Using a simple measure proposed by Messrs Kohlberg, Neyman, and Tepper, Japan's R Score is 2.09. With both Singapore and Hong Kong introducing stricter social constraints over the last two days, Japan's Swedish-style response is facing increasing domestic criticism. Several LDP politicians and supporters have distanced themselves from PM Abe's two-masks policy. Although far from disinterested parties, Rakuten (4755 JP)'s @hmikitani and Softbank Group (9984 JP)'s @masason have both taken to Twitter to urge for the declaration of a state of emergency. The former has however been slow to prevent price-gouging for masks sold on the Rakuten platform. Even the influential Keidanren business federation has now accepted that a state of emergency is 'acceptable' on condition that 'vital services' are not too severely disrupted.Source • NHKTOKYO AT THE TIPPING POINT - Even the normally-quiescent NHK fired up their graphic team for last night's '7 NEWS'  to illustrate that Tokyo is 18 days away from an exponential explosion unless there is an 80% reduction in social activities. Source • NHKGOVERNOR KOIKE - Although firmly stating that a full lockdown of Tokyo is legally 'impossible', Gov. Koike is gently prodding the national government towards stricter measures and continues to warn businesses to make the necessary preparations as only grocery stores, bank and medical facilities would remain open. She has requested residents to stay at home this weekend and is recommending avoiding the three "C's" - Crowded, Confined spaces where Conversations take place until further notice. Taking a leaf from Governor Cuomo's book, she is now giving daily updates on YouTube, including one in English. Having harboured ambitions for higher office in the past, the contrast she is drawing with the apparently-hapless Prime Minister is being made abundantly clear. Many LDP officials, however, remain wary of her 'un-Japanese' opportunism and her authoritarian and unpredictable nature. As in the United States, personal and political rivalries are obstructing to sensible policy-making.   Source • GooglePARTIAL LOCKDOWN - Many restaurant chains including Torikizoku (3193 JP), Kushikatsu Tanaka (3547 JP)  and Hub (3030 JP) and karaoke and entertainment facilities such as Daiichikosho (7458 JP), Koshidaka (2157 JP) and Round One (4680 JP) have announced the closure of their facilities for several weeks and join the department stores and cinemas that closed last and will be so again this weekend. Even the Spring Sumo tournament has been delayed for at least two weeks. As confirmed by Google's excellent Community Mobility Reports above, Tokyo is gradually heeding the call. The March Services PMI for Japan suggests a year-on-year contraction of 8%. The onus will now pass to the national government to mitigate the losses.Source • US Embassy, Tokyo'GET-OUT-OF-EDO-BABY-GO' - The US Embassy in Japan is recommending that any US citizens who are not prepared to stay in Japan for several months or who are concerned about not being able to receive appropriate medical care should leave immediately. Those who do will, however, not be allowed to return for an as-yet-unspecified period.  Even Japanese nationals are now required to spend fourteen days in quarantine. All residence visas that expire before the end of June be extended by three months. From April 3rd and until further notice, non-Japanese of any residence status, including permanent and spouses of Japanese nationals, are to be denied re-entry if they leave Japan. Welcome to the lock-in without a lockdown!RELIEF MEASURES - A potpourri of relief measures and new policies are doing the rounds in government circles including some or all of the following:- 

¥300,000 - A one-time non-taxable payment will be made to qualified households that are suffering financially from a loss of income. About 10 million households are expected to qualify. It has already been necessary to make clear that the adult entertainment industry will not be eligible for public funds. ¥300,000 is equivalent to the annual amount spent on a pet dog in Japan.

PREFERENCE SHARES - Large firms such as airlines, shippers and auto manufacturers may be eligible for rescue packages in the form of preference shares issued to the Development Bank of Japan of up to ¥400 billion each. The allocation of such funds will be a subject of much political jostling, while smaller businesses that lack the right connections may not be deemed eligible. We would now be wary of being aggressively 'short' these sectors.

FIVE-YEAR INTEREST-FREE LOANS - While a welcome measure for some SMEs, this measure may not be sufficient for those already-indebted businesses with large numbers of regular employees operating out of rented accommodation, of which Japan's legion of wholesalers is a prime example.

TAX MORATORIA - The government is to grant a moratorium on tax payments by companies that have seen their monthly revenues fall by more than 20% from the previous year due to COVID-19.

WRITE-DOWNS - The Japanese ASB and the FSA have announced that companies will be allowed greater leniency regarding asset writedowns for idle plants and stores

SUBSIDIES - The government will fully-subsidise the increase in production of Fujifilm (4901 JP)'s Avigan drug and ventilators from a variety of manufacturers. Avigan will be offered for free to other countries.

DE-GLOBALISATION - Toyota Motor (7203 JP) and Honda Motor (7267 JP) are in talks with the Ministry of Economy, Trade and Industry to move some or all of their supply chains our of China. Nissan Motor (7201 JP) is seemingly no longer considered relevant in this regard. Japanese corporates will also begin a process of unwinding unprofitable overseas operations to support their domestic activities, a move that will help keep the Yen relatively stable over the medium term.
While large Japanse corporations are relatively well-placed to weather this storm, the Japanese government is fiscally constrained and grossly indebted relative to GDP. Given the now-inflationary global outlook, we would expect the Bank of Japan to be the least generous of the central banks in response to COVID-19, which will also be supportive of the Yen.In the DETAIL section below, we shall review our targets for our Results and Revisions Scores, and the market overall, look at our updated trailing aggregate actual profits and multiples and review Fridays' Results and Revisions. Finally, we shall suggest that Japan is well-placed for the emergent post-COVID economic world order and conclude that we would be buyers of Japanse equities into the second wave of the COVID-19 downturn.

🇯🇵 JAPAN MARKET UPDATE 5th April 2020 • Overshoot

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

Equity Bottom-Up

<p>This insight takes a look at the fundamentals of <a href="https://www.smartkarma.com/entities/nissan-shatai-co-ltd" target="_blank" data-smartkarma-citation="entities:9104:1" rel="noopener">Nissan Shatai (7222 JP)</a> (will also be referred to as Shatai) -the passenger vehicle and LCV manufacturer for <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a>.</p>
<p>Our key points are:</p>
<ul>
<li>The company’s revenue growth has been fairly stable over the past five years. However, given the economic conditions in its key markets (the U.S., China, and Japan), the company expects a decline in revenue for FY03/20. This is the case with most automakers.</li>
<li>We expect Shatai’s LCV segment to be its key growth driver over the long term. However, the company might need to invest appropriately to capitalise on the opportunities in the commercial vehicle (CV) industry.</li>
<li>Given the absence of close local players, we have compared Shatai with two Chinese peers- <a href="https://www.smartkarma.com/entities/jiangling-motors-corp-ltd" target="_blank" data-smartkarma-citation="entities:28250:1" rel="noopener">Jiangling Motors Corp Ltd (000550 CH)</a> and <a href="https://www.smartkarma.com/entities/beiqi-foton-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:4732:1" rel="noopener">Beiqi Foton Motor Co Ltd A (600166 CH)</a>.</li>
<li>During the recent quarters, Shatai has been underperforming these peers on revenue growth rates. However, historically, when market conditions have been good, Shatai has been able to generate growth rates close to these peers (sometimes better).</li>
<li>Profitability has declined on both gross and operating levels. However, Shatai’s OPM has been relatively less volatile when compared to its peers.</li>
<li>The company enjoys a strong cash position (with positive FCF over the past five years), with net cash at almost 77% of its market cap.</li>
<li>The company is trading below the historical median of its peers on EV/EBIT, but looks quite expensive on PE. That said, we think that EV/EBIT is a better metric to value Shatai as the PE multiple does not price in the company’s strong cash position.</li>
<li>We note Effissimo Capital’s (the second major shareholder) rising stake in the company, with ownership being held since 2007. Thus, Effissimo possibly thinks that Shatai is likely to report better results as it focuses on LCVs or is probably interested in buying out Shatai or being bought out of it by Nissan.</li>
<li>We also note that Shatai’s relationship with Nissan is similar to that which Toyota Auto Body Co. had with <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a>.  Given that Toyota Auto Body was eventually bought by Toyota in 2011, we feel that a similar scenario might be possible with Shatai.</li>
</ul>
<div class="content-highlight">
<p>In short, Shatai seems to be a company with potential, and its cash-rich position would make it an attractive acquisition target via an LBO if Nissan were willing to sell. We will be following up on this, looking at the possible ways Shatai could be bought (or sold) and if Nissan or Effissimo will be interested in doing so.</p>
</div>

This insight takes a look at the fundamentals of Nissan Shatai (7222 JP) (will also be referred to as Shatai) -the passenger vehicle and LCV manufacturer for Nissan Motor (7201 JP).
Our key points are:

The company’s revenue growth has been fairly stable over the past five years. However, given the economic conditions in its key markets (the U.S., China, and Japan), the company expects a decline in revenue for FY03/20. This is the case with most automakers.
We expect Shatai’s LCV segment to be its key growth driver over the long term. However, the company might need to invest appropriately to capitalise on the opportunities in the commercial vehicle (CV) industry.
Given the absence of close local players, we have compared Shatai with two Chinese peers- Jiangling Motors Corp Ltd (000550 CH) and Beiqi Foton Motor Co Ltd A (600166 CH).
During the recent quarters, Shatai has been underperforming these peers on revenue growth rates. However, historically, when market conditions have been good, Shatai has been able to generate growth rates close to these peers (sometimes better).
Profitability has declined on both gross and operating levels. However, Shatai’s OPM has been relatively less volatile when compared to its peers.
The company enjoys a strong cash position (with positive FCF over the past five years), with net cash at almost 77% of its market cap.
The company is trading below the historical median of its peers on EV/EBIT, but looks quite expensive on PE. That said, we think that EV/EBIT is a better metric to value Shatai as the PE multiple does not price in the company’s strong cash position.
We note Effissimo Capital’s (the second major shareholder) rising stake in the company, with ownership being held since 2007. Thus, Effissimo possibly thinks that Shatai is likely to report better results as it focuses on LCVs or is probably interested in buying out Shatai or being bought out of it by Nissan.
We also note that Shatai’s relationship with Nissan is similar to that which Toyota Auto Body Co. had with Toyota Motor (7203 JP).  Given that Toyota Auto Body was eventually bought by Toyota in 2011, we feel that a similar scenario might be possible with Shatai.


In short, Shatai seems to be a company with potential, and its cash-rich position would make it an attractive acquisition target via an LBO if Nissan were willing to sell. We will be following up on this, looking at the possible ways Shatai could be bought (or sold) and if Nissan or Effissimo will be interested in doing so.


Nissan Shatai - Strong Cash Position and Cash Flows Seem to Have Attracted Effissimo

<div><p>The short notional in the market for the data released 31 March is US$33.19bn (down by US$60mm excluding FX movements and ETFs) with the largest short positions in <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a>. <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1"></a></p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a> and <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:8244:1">Leopalace21 Corp (8848 JP)</a> <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1"></a>while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/nitta-gelatin-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1481:1">Nitta Gelatin (4977 JP)</a>, <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/j-trust-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20246:1">J Trust Co Ltd (8508 JP)</a>, <a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a> and <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>. </p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Co Ltd (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:10928:1">Sbi Holdings (8473 JP)</a> and <a href="https://www.smartkarma.com/entities/japan-airport-terminal-co" target="_blank" rel="noopener" data-smartkarma-citation="entities:18034:1">Japan Airport Terminal Co (9706 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/tokyo-electron-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:280:1">Tokyo Electron (8035 JP)</a>, <a href="https://www.smartkarma.com/entities/nitto-denko-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3666:1">Nitto Denko (6988 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a> and <a href="https://www.smartkarma.com/entities/kikkoman-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:11720:1">Kikkoman Corp (2801 JP)</a>.   <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1"></a></p></div><div><p>Sectorally, short positions increased in Consumer Discretionary (US$242m), Industrials (US$29m) and Financials (US$23m) while shorts decreased in Information Technology (US$229m) and Materials (US$72m).</p></div>

The short notional in the market for the data released 31 March is US$33.19bn (down by US$60mm excluding FX movements and ETFs) with the largest short positions in Fast Retailing (9983 JP), Itochu Corp (8001 JP), Toyota Motor (7203 JP), Canon Inc (7751 JP) and Shiseido Co Ltd (4911 JP). Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Aruhi Corp (7198 JP), Taiyo Yuden (6976 JP) and Leopalace21 Corp (8848 JP) while the stocks with the highest days to cover are Nitta Gelatin (4977 JP), Vital Ksk Holdings (3151 JP), J Trust Co Ltd (8508 JP), Katakura Industries (3001 JP) and Itochu Corp (8001 JP). The largest increases in short notional over the week were Fast Retailing (9983 JP), Shiseido Co Ltd (4911 JP), Sbi Holdings (8473 JP) and Japan Airport Terminal Co (9706 JP) while shorts were covered in Tokyo Electron (8035 JP), Nitto Denko (6988 JP), Subaru Corp (7270 JP) and Kikkoman Corp (2801 JP).   Sectorally, short positions increased in Consumer Discretionary (US$242m), Industrials (US$29m) and Financials (US$23m) while shorts decreased in Information Technology (US$229m) and Materials (US$72m).

Huge Increase in Shorts on Nikkei225 & Topix ETFs

Japan

Toyota Motor Corporation manufactures, sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. The Company also operates financing services through their subsidiaries. Toyota Motor builds homes, produces pleasure boats, and develops intelligent transportation systems including radar cruise control and electronic toll collection systems.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Toyota Motor (7203 JP)

Recent GPIF Moves - Rebalancing & ESG

As noted in the last insight about The GPIF's New Policy Mix (and its preceding GPIF Policy Mix Changes Ride to Global Risk Rescue), the GPIF has...

Travis Lundy

The Big Short: All Sectors See An Increase

The short notional in the market for the data released 7 April is US$33.02bn (up by US$1,509mm excluding FX movements and ETFs) with the largest...

Brian Freitas

🇯🇵 JAPAN MARKET UPDATE 5th April 2020 • Overshoot

OVERSHOOT - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's...

Campbell Gunn

Nissan Shatai - Strong Cash Position and Cash Flows Seem to Have Attracted Effissimo

This insight takes a look at the fundamentals of Nissan Shatai (7222 JP) (will also be referred to as Shatai) -the passenger vehicle and LCV...

Aqila Ali

Huge Increase in Shorts on Nikkei225 & Topix ETFs

The short notional in the market for the data released 31 March is US$33.19bn (down by US$60mm excluding FX movements and ETFs) with the largest...

Brian Freitas

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)