Is Japan Running out of Magic?

06/06/2013 5:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

After a rebound rally, the yen and the Japanese market have reached a breaking point that will seriously test the Abe government's ambition, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Japanese Prime Minister Shinzo Abe disappointed today. He was supposed to pull another rabbit out of his hat...but today's speech didn't just forget the rabbit. It barely showed the hat.

Abe's speech had been billed as the next stage—Stage 3—in his plan to revive the Japanese economy. Talk in Tokyo and press reports were that he would lay out a plan that would push cash from Japan's public pension funds—with $2 trillion in assets—from Japanese government bonds to domestic stocks and overseas assets.

That would be enough, market analysts speculated, to reverse the upward trend in the yen, and end the correction in Japanese stocks.

But the actual speech was disappointingly short on specifics. The prime minister said he would promote private-sector investment. He will ask for legislation to open up the energy, health, and infrastructure sectors to foreign investment, as part of an effort to double foreign investment in Japan by 2020. He wants to see 3% annual growth.

But, and this is critical, Abe never got more specific on changes to public pension investment than to say that a group of experts would make recommendations for changes in the fall. The speculation in Tokyo is that Abe decided not to get more specific in order to avoid conflict with powerful interests in agriculture and other Japanese industries ahead of the July 21 election for the upper house of Parliament.

And with that, the yen resumed its rally against the US dollar. As of last night, the yen traded at 99.20 to the dollar. We're in critical territory here, since 99.5 has so far marked the top of the range for the yen versus the dollar (with 103.50 as the bottom).

A dollar rally back to that level would stabilize the market-for the day—but a significant drop below 99 would likely lead to another round of yen buying. (The Nikkei-225 stock index fell another 3.8% overnight.)

The key data point over the next few days is the US jobs report for May, due Friday morning. The consensus forecast has slumped slightly in the last few days, to 159,000 from 166,000, according to economists surveyed by Briefing.com. That would be a slight drop from the 165,000 net jobs added by the economy in April.

US stock markets have been rattled today by the drop in Tokyo and the jobs numbers for May in the private ADP survey released this morning. That survey doesn't always track the government results to be announced on Friday, but the market isn't inclined to overlook the significant miss—135,000 jobs added, versus a consensus among economists of 157,000.

The S&P 500 is down 1.4% as of yesterday's close, to 1,608.90. That puts the index into critical territory: a 50% retracement of the April-May move would take the index down to 1,611. The 50-day moving average for the index sits right at 1,608.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. For a full list of the stocks in the fund as of the end of March, see the fund's portfolio here.

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