From Abenomics dividend to "Sell Japan": "Naotrade" exit, Japan falls into triple kill of stocks, bonds, and currency.

Japan's newly appointed Prime Minister, Kanji Hayashi, is facing the first major market test of her political career, as the tense atmosphere surrounding the upcoming massive stimulus package expected to be introduced by her new Japanese government is engulfing the financial market rally ignited at her election. Since the beginning of this week, the Japanese stock market, once ignited by the so-called "Kanji Hayashi frenzy trading," has been continuously plummeting. On Tuesday, the Nikkei 225 index fell by more than 3%, marking the largest drop since April, while the yen and Japanese government bonds have been on a continuous downward trajectory due to the extreme enthusiasm towards "Abenomics" expected to be introduced by Kanji Hayashi. The market is increasingly worried that Kanji Hayashi's massive spending plan will further worsen Japan's long-standing pessimistic fiscal situation, leading to a significant drop in Japanese government bond prices and exacerbating the ongoing weakness of the yen. The yen has further depreciated to its lowest level in 10 months against the US dollar. At the same time, the Nikkei 225 stock index recorded its largest decline since April this week. 64-year-old Kanji is a conservative nationalist who considers former British Prime Minister Margaret Thatcher as one of her role models. She has long been an ally of Japan's longest-serving Prime Minister, Shinzo Abe, who was once assassinated, and a staunch follower of Abe's policies. This is also why the current financial market is starting to bet on the resurgence of "Abenomics." Recently, the so-called "Kanji Hayashi trading" has been hot globally, referring to the financial market's expectation of a restart of the core policy of "Abenomics" (actively promoting "ultra-loose fiscal framework" + holding a reserved and cautious position towards tightening monetary policy) after Kanji Hayashi was elected as the new leader of the Liberal Democratic Party of Japan. This expectation has caused significant volatility in the stock, bond, and currency markets. The current pessimism in the market is spreading, with the rise of "Sell Japan" trading as her government is expected to announce the long-awaited economic plan on Friday. The pressure to sell Japanese assets is increasing, with long-term Japanese government bond yields at their highest levels in decades, the yen depreciating by 1% overnight, and the Nikkei 225 rebounding but facing growing market selling pressure. Despite a rebound in the Japanese stock market on Thursday, driven by Nvidia's strong performance growth, the rebound has mainly focused on Tokyo Electronics, Advantest, Shin-Etsu Chemical, and other companies benefiting from the AI chip industry chain. The risk of Japanese stock sell-offs due to the latest diplomatic tensions between Japan and China remains. "If Kanji loses policy credibility, investors will start selling all domestic assets in Japan," said Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management. "If people feel that the risk of policy mistakes by the new Japanese government is increasing, we will certainly increase our bearish trades on the yield curve of government bonds." The recent cross-asset sell-off highlights the vulnerability of the so-called "Kanji frenzy trading." Previously, bets on her fiscal expansion plan boosting Japan's economic growth had pushed the Japanese stock market to record highs in October. However, by November 19, less than a month after Hayashi assumed office, a major diplomatic event had caused the Nikkei 225 index to erase all gains made since her election, presenting investors with a sharp reality check. The yen-dollar exchange rate has also fallen to its weakest level since January this year, mainly due to market fears of a resurgence of "Abenomics," leading to a significant increase in government debt issuance and a cooling of expectations for Fed rate cuts, thereby significantly boosting the dollar exchange rate. Currently, the yen is trading around 157 yen to the dollar if the yen depreciates to below 158.87, it would reach its weakest level since July last year. "The honeymoon period between the market and Kanji is over," said Amir Anvarzadeh, Japan Stock Strategist at Asymmetric Advisors Pte. He noted that while traders initially cheered Kanji and her supportive stimulus policies, many are now "drowning in the Japanese market." Anvarzadeh indicated that it's not only concerns about increased fiscal spending that are depressing sentiment. In the past two weeks, Kanji has abandoned Japan's goal of achieving a balanced annual budget, vowed to reduce the emphasis on corporate governance principles at the shareholder level, and sparked a diplomatic dispute with Beijing. These actions have shaken overseas investors, resulting in downward pressure on the stock market and soaring bond yields. Market fears of a major fiscal stimulus in the style of Abe's administration are on the rise The announcement of the stimulus plan will be the next crucial test. Kanji-led stimulus plan is expected to exceed the approximately 13.9 trillion yen package introduced by her predecessor, with some lawmakers pushing for an incredibly aggressive additional budget of around 25 trillion yen. Under the pressure of fiscal concerns, the Japanese market has reached several key milestones. "The scale of 25 trillion yen is undoubtedly very large, and people are questioning whether it is really necessary," said Hiroshi Namia, Chief Strategist and Fund Manager at T&D Asset Management. He is concerned that there is a risk of a so-called "triple decline" after the plan is announced i.e., continuous declines in the stock market, bond market, and yen simultaneously, similar to the market turmoil that swept across the UK during Liz Truss' tenure in 2022. Alex Loo, TD Securities' macro strategist in Singapore, said that if Kanji seeks "a large super budget," long-term Japanese government bond yields may further rise, and the yen may weaken to around 160 yen to the dollar. Currently, the yen continues to hover near its weakest level since January against the dollar. Alex Loo said that any further downward trend could prompt Japanese authorities to intervene in the currency market. An indicator tracking the pace of yen depreciation one of the key triggers for official intervention by the Ministry of Finance has approached levels consistent with previous interventions several times in the past month. Normally, a weak yen would significantly support the Japanese stock market, especially stock prices of export-oriented companies, but concerns about diplomatic tensions between Tokyo and Beijing, along with the ongoing pullback of global tech stocks and crypto assets, have left major benchmark indices in the Japanese stock market struggling to catch their breath. On Thursday, driven by Nvidia's strong performance boosting investor sentiment in global stock markets, the Nikkei index rose by over 3%. However, as shown in the chart above, the performance of this month's blue-chip benchmark stock index in Japan lags behind the S&P 500 index and the MSCI global stock market benchmark index. "What you see is a very counterintuitive asset mix: Despite the weak yen, the performance of the Nikkei index is not good," said Vishnu Varathan, Head of Economics and Strategy at Mizuho. "Despite higher Japanese government bond yields, the yen is also performing poorly." Although short-term volatility may continue, some investors still believe that Kanji's spending plan will support Japanese equity assets in the long run. Thomas Matthews, Head of Asia-Pacific Markets at Capital Economics, said that injecting government funds could boost the Japanese economy, strengthening the case for rate hikes and bolstering the yen. "If she implements a large-scale fiscal stimulus and the economy starts to overheat, rate hikes will be inevitable, and the stock market will face difficulties," Matthews said. He added, "But this could trigger a sharp rebound in the yen next year."