4 August 2024

Musha Research CommentaryS\Strategy
Bulletin (No. 360)

The " weak yen is bad "theory is killing stock prices
How to view the Midsummer Nightmare?
A Midsummer Nightmare
The Nikkei Stock Average hit an all-time high of 42224 yen on July 11, and then began
to fall, plunging 15% in a little more than half a month to 35909 yen on August 2. Threefactors have been pointed out as the background. The first is the global stock pricecorrection. U.S. stocks (SP500) have fallen 6% in the last 3weeks after rising 20% since
the beginning of the year, and the NASDAQ has fallen 10% in the same period after rising
26% since the beginning of the year, which is within the range of cyclical adjustments.
The timing of the shooting of Mr. Trump, Trump's nomination for president at theRepublican convention, and Biden's withdrawal from the presidential race changed theleader in U.S. equities, causing major tech stocks to sell off, while small-cap and energy
stocks that benefit from Trump's policies such as tax cuts and deregulation attracted
funds.
The U.S. economy is slowing as the Fed had hoped, and a rate cut in September is on
the horizon, but this was also perceived as a negative factor by the market. The hardlanding scenario for the U.S. economy began to be discussed, even though we believe,
the likelihood of this happening is negligible.
Second, the rapid appreciation of the yen forced hedge funds that had been betting on aweaker yen and higher Japanese stock prices to unwind their positions. Intervention by
the BOJ and a series of statements by politicians that interest rates should be raised toprevent the yen from weakening turned the tide in the foreign exchange market.

Why the BOJ has changed the stanceThird, the BOJ's surprise interest rate hike has quickly spread uncertainty about Japan's
macroeconomic policy. The Nikkei 225 plunged 8% in the two days following the rate hike,and the Nikkei 225 fell another 3% to 34,800 yen in overnight futures trading on August
2, underscoring the outstanding weakness of Japanese equities. The Nikkei 225's 26%
gain since the beginning of the year to its all-time high on July 11 was quickly reduced toa 5% gain at the close of overnight futures trading last Friday.

Figure1:Stock Price Index in Major countries

1/1/2023=100

JP

USDEKRCN

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 82023
2024

850
800
750
700
650
600
550
500
450
400
350
300
250
200
150
100
500（2009/3/9＝100）
US S&P500

USJP Nikkei

JapanDE DAX

CN Shanghai
Composite
KR KOSPI

Germany
Korea
China

20092010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

160
155
150
145
140
135
130
125
120
115
110
105
100
959085

Source: Bloomberg, Musha Research

1/3Musha Research Co., Ltd.
President
Ryoji Mushamusha@musha.co.jp
http://www.musha.co.jp
Tel ＋81-3- 3740 2143
2-16-7-3912, Konan,Minato-ku, Tokyo
108-0075,Japan

Strategy Bulletin vol359

4 August 2024

Of the above three factors, the prominent decline in Japanese equities was triggered by the BOJ's interest rate
hike. The market's confusion centered on the sudden change in Governor Ueda's stance. Based on his previous
explanations, a rate hike in July was unlikely. Real wages fell -1.3% y/y in May, the 26th consecutive month inwhich wages have been below water. Although there is a possibility of a positive turnaround in early fall, someobservers believe that it will not emerge until next year. Real consumption expenditures (y/y) were -6.3% inJanuary, -0.5% in February, -1.2% in March, 0.5% in April, and -1.8% in May, remaining on a negative trend. Given
this, the BOJ lowered its outlook for real GDP growth in FY2024 from 0.8% to 0.6% in its July Outlook Report.
While Governor Ueda has said that he is data-driven, he decided to raise interest rates before the data became
clear, which shows that he is in front of the curve.
Furthermore, his tone on the yen's depreciation has changed substantially; in April, he had indicated that theimpact of the yen's depreciation on prices would be negligible. However, at the press conference held at the endof July, he changed his stance, saying that he had taken early action (raising interest rates) because there was arisk that the upward pressure on prices due to a weaker yen would push prices above the 2% target, even though
the dollar/yen exchange rate had not changed from around 155-yen level.
The market was convinced by the conventional explanation that "the main cause of price hikes is cost-push factors
originating overseas, which leads to a decline in real household incomes and an increase in the burden on
corporate profits. tightening monetary policy to curb these factors will worsen the economic and employment
environment,"
Yet, at its July meeting, the BOJ shifted its stance to the need to raise interest rates because of the large negative
impact of the exchange rate on prices.

Markets try to discount the BOJ's change in thinking to the maximum extentThere are two reasons for the change of BOJ policy stance: (1) political pressure and (2) the BOJ's rate hike bias.
The government and the ruling party have made a series of statements calling for the BOJ to take action to deal
with the weak yen. Prime Minister Kishida stated on July 19 that "normalization of monetary policy will support
the transition of the economic stage," and furthermore, Digital Minister Kono and LDP Secretary-General Mogi
followed with statements calling for an interest rate hike. It is possible that the Bank succumbed to this pressure.
Second, the BOJ may have been preoccupied with its innate desire to "normalize monetary policy" and is now
impatient for rate hike. It is said that there is a common perception among BOJ officials that real interest rates are
too low: the CPI for June was 2.8% and the yield on JGBs was 0.9, so the real interest rate was a substantial 1.9%, and "borrowing benefit " are still high. BOJ officials think this negative real interest rate situation to provide
room for interest rate hikes. This is a desire to secure a margin to cut interest rates if the economy deteriorates inthe future. Negative real interest rates have been maintained to promote risk-taking and increase demand, but
the tone may shift to the side effect of causing moral hazard.
If the market begins to suspect that the BOJ has shifted its stance from promoting risk-taking, which has continued
for a decade since the Abe-Kuroda regime, to curbing risk-taking, it will cause a landslide deterioration ininvestment sentiment. Governor Ueda brushed off fears of an economic stall, saying, "Since the adjustment is ata very low interest rate level, there will be no major negative impact on the economy. However, there is noguarantee that the nightmare of 2000 and 2007, when a premature rate hike coincided with the U.S. recession
and rate cut cycle and caused the yen to appreciate, will not repeat itself.

Do not repeat the root cause of the lost 3 decades, premature monetary and fiscal
tightening.
Another concern is the fiscal drag on the economy. The government's tax revenues have been inflated by theweak yen and inflation. The government has compiled estimates that the primary balance will be in surplus in
FY2025, a sharp recovery from -5.2% in 2023 (OECD, November 2023). That means that, viewed in reverse,
public finances will depress private demand by 2.6% per year between 2024 and 2025. While the weak yen's
inflation is depriving households of income in the form of lower real incomes, it is also generating huge income
transfers to the government. If this massive income in the form of higher government tax revenues is left
untouched, private consumption will suffer a major blow. At this point, it is necessary to bail out individuals whocontinue to suffer the disadvantages of the weak yen and have not yet entered the wave of prosperity, but theprescription is clear. The public finances, enriched by inflation, should return the money to the people whose
income has been stolen by inflation in the form of permanent tax cuts.
Twice in the past, in 2000 and 2007, Japan's premature fiscal and monetary tightening exacerbated the recession
and the lost era, which should have ended in 10 years, continued for 20 or 30 years. The sharp decline inJapanese stock prices may be a reminder not to repeat the mistakes of the past this time around.
2/3Musha Research.

Strategy Bulletin vol359

4 August 2024

Sharp Rebound Expected
Nevertheless, the BOJ should be extremely reluctant to be seen That the BOJ's decade-long promotion of risktaking have shifted all at once to a restraint of risk-taking. Also, the slowdown in the U.S. economy should be seen
as a factor that will promote interest rate cuts and thus boost stock prices. The Japanese government has alreadysent out a message that it will be watching the decline in stock prices closely, and the BOJ may well set a tone ofrelief for the market. If the market's sharp selloff is based on the exaggerated paradigm shift it is likely to be an
excellent buying opportunity. Strong corporate earnings and sharply more attractive stock valuations may provide
a good buying opportunity for all investors who are feeling the risk of not owning Japanese stocks (FOMO).

《Reference:》
Premature shift to monetary and fiscal tightening brought about the double-dip
weakness in the Japanese economy.
The GFC was a financial crisis in the U.S. and other countries. However, Japan, which was the furthest awayfrom the epicenter of the crisis, suffered the greatest economic impact, and its stock prices slumped the longest.
The premature tightening of policy caused the yen to appreciate, pushing stock and real estate prices down
beyond their intrinsic values and imposing additional costs on companies, plunging Japan's economy and stock
prices, which had been recovering, into a double-dip recession. The total market value of Japan's national wealth,including land and stocks, peaked at 3,142 trillion yen at the end of 1989 and bottomed out at 1,723 trillion yen at
the end of 2002.But fell further after the GFC to 1,512 trillion yen at the end of 2011 (and has recovered remarkably
to 2,410 trillion yen at the end of 2023). This double-dip recession could have been avoided if the correct policies
had been taken.

Figure 2: Vigorous Recovery of Japan
with 5 Indices (1984=100)

Figure 3: Japan's Land + Stocks Market Value
Trends, Double-Dip after GFC Doubled the Pain

3500
500
450(JPYtrl)
Personal Financial Asset
2023.3Q441.6

3000

Equity 株 式

4002500

350

Nikkei
Av.
2024.Q1369.4

300
250200150Land 土 地

2000

Employee Comp.
2023.Q4187.7

1500

1000

100
Corporate Taxable
IncomeLand Price Idx.
FY2023 (e)265(6majer cities)
02023.73.5
8082848688909294969800020406081012141618202224

50500

0

Source:MoF,DoL,BoJ,Japan Reaestate Institute,Bloomberg,Musha Research
FY2023年Corporate Taxable Income forcast by

80 83 86 89 92 95 98 01 04 07 10 13 16 19 22© Copyright 2023 Musha Research Co., Ltd. Although the information contained herein is based on sources that Musha Research believe reliable, Musha Research do not make any representation orwarranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of the information and opinion herein. Musha Research is not responsible for any losses
or damages incurred by your relying on such information and opinion. The analyses or opinions contained herein may be based on assumptions that if altered can change the analyses or opinion expressed.
Nothing contained herein shall constitute any representation or warranty as to future performance of any financial product, credit, currency rate, interest rate or any other market or economic measure.
Furthermore, past performance is not necessarily indicative of future results. Musha Research has no obligations to update, modify or amend this document or to notify a reader in the event that any matterstated herein changes or subsequently becomes inaccurate. When you analyze risks and issues on investment, finance, tax, law and/or accounting conta ined herein, you should take steps to ensure thatyou understand the transaction and have made an independent assessment of the appropriateness of the transaction and it is strongly recommended to seek advice from your own experts and/or advisors,in light of your own objectives and circumstances. This document shall not be construed as and does not form part of an offer, nor an invitation to offer, nor a solicitation or recommendation to enter into anytransaction with DSI or any of its affiliates, nor is it an official or unofficial confirmation of terms. This document and any information contained herein are confidential and may not be reproduced or distributedin whole or in part without our prior written consent.

3/3Musha Research.