Robert Brooke of GLG Japan CoreAlpha (A wholly owned subsidiarity of Man Group Plc (LON:EMG) (PINK:MNGPY) (PINK:MNGPF)) recently wrote on the state of Japan and the West in 2011 and a preview into 2012 entitled, “GLG Views: Japan 2012: the year of the Dragon”. Brooke begins the article by highlighting Japan’s tough year starting with the devastating earthquake turned tsunami that wiped out any traces of a recovery in the country. The country’s trying year continued to take its toll:
“In late summer, scarcely had Japan’s economy started to recover from this extreme natural disaster than the second round of the European sovereign debt and banking crisis cast its chilling shadow over the world. As if that were not enough, the autumn brought more catastrophes. The natural disaster of huge floods in Thailand caused massive disruption to major Japanese manufacturers for the second time this year, while the man-made disaster of alleged accounting irregularities at the camera maker Olympus cast yet another pall over the stock market”.
Last year was a banner year for hedge funds in general, as the industry attracted $31 billion worth of net inflows, according to data from HFM. That total included a challenging fourth quarter, in which investors pulled more than $23 billion from hedge funds. HFM reported $12 billion in inflows for the first quarter following Read More
Brooke does say that even though Japan’s banks have taken a hit in 2011, they fared much better than Western banks. As previously stated, the European debt crisis destroyed bank values and has put a serious strain on the European Central Bank. Luckily for Japan, they haven’t dealt with similar circumstances. Instead, Brooke says that since the bubble burst of 1989, Japanese trends in the economy have been dictated by the credit cycle which appears to be finally at the bottom of the cycle for the first time since Japan’s credit strain began back in 2005.
Brooke says there are many reasons why the risk factor is now in Japan’s favor after all these years. Here are his views on the topic:
“First, when the stock market peaked in 1989, Japan had nineteen major banks. Today, that number has shrunk to seven. What is more, none of those nineteen still exists under the same name and therefore in the same shape as it did in 1989.”
“Second, as of the end of the last financial year on 31 March 2011, two important figures were released. In the worst part of the banking collapse, between 1999 and 2003, the Japanese government injected JPY 12.4trn (USD 150bn) to stabilise and recapitalise the system. Of this, 99% has now been repaid. During the 1990s, the government also guaranteed all deposits in the banking system based on the belief that the loss of any deposits would trigger an unmanageable run. As a result, large losses were accumulated by the Deposit Insurance Corporation of Japan (DIC), the government body that implemented the guarantee scheme. In the financial year ending 31 March 2011, the DIC reported that, for the first time since the 1990s, its accumulated losses had been run down to zero.”
The bottom line, Robert Brookes is arguing that Japan has finally come to the bottom of its lending misfortunes over the years while Europe has yet to hit the bottom. Credit cycles take a long time to recovery which why it makes sense that we are seeing such slow progress in Europe and the US. Could we see a turning of the tides where Japan begins a period of economic prosperity? We will have to wait and see.
This explains why Man Group Plc is very bearish on the global economy but bullish on Japan. The alternative investment’s Japan core Alpha is up 19.1% ytd.