Japanese Equities

A Practical Guide to Investing in the Nikkei

Michiro Naito

• Publisher: Wiley
• Year: 2019
• Print ISBN: 9781119603665
• eBook ISBN: 9781119603696
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

An indispensable resource for anyone wishing to understand and successfully invest in the Nikkei.

Recent years have seen steady growth in investor interest in the Japanese equity market, the second largest in the world. Japanese Equities describes how the Nikkei works, explains its driving factors and presents a collection of insightful case studies to help you successfully invest in the market. Author Michiro Naito, a former equity derivatives/quantitative strategist for J.P. Morgan Securities Japan, helps you understand the ups and downs of the market and capitalise on its money-making opportunities.

Already a substantial part of many equity investor portfolios, the Nikkei exhibits characteristics that respond more sensitively to global economic conditions than other developed markets. This valuable book helps you grasp the idiosyncrasies of the market and correctly time investing decisions to maximise profits. This English translation of the original Japanese book includes additional chapters discussing recent political developments that influence the Japanese economy such as the re-election of Prime Minister Shinzo Abe, the trade policies of Donald Trump (the US-China trade war) and the difference in monetary policy between the Bank of Japan and the FED. This book:

• Offers a simple quantitative strategy to take advantage of the cyclical trends and repeating patterns of the Nikkei to attain desirable returns
• Explains how derivatives instruments affect the equity market, which is seldom covered in textbooks
• Highlights a quantitative approach supported by solid historical back-tests
• Discusses fundamental and technical factors that underlie the movement of the Japanese equity market
• Provides insights drawn from the author's decades-long research and experience working in the securities industry

Japanese Equities: A Practical Guide to Investing in the Nikkei is a must-have text for investors, hedge fund and pension fund managers, academics, researchers and students of international finance.

CHAPTER 1
Macro Indicators and Seasonality

If the equity market is a reflection of the economy, then what can tell us about the state of the economy? The answer lies in macro indicators. Here, we focus on those I believe to be the most effective when used with the Japanese equity market, the OECD CLI and Economy Watchers' DI, and those perhaps less effective but nevertheless important, ISMPMI and seasonality.

OECD CLI

OECD CLI stands for Organization of Economic Co‐operation and Development Composite Leading Indicators, which are the series of macroeconomic indicators released monthly by the OECD. Since an in‐depth explanation of how these indicators are constructed and calculated is beyond the scope of this book, interested readers should refer to the relevant section on the OECD homepage (http://www.oecd.org/sdd/leading‐indicators/).

The OECD CLIs were originally developed by the OECD to forecast the peaks and valleys of the economy. The history of CLIs goes back to the 1960s, and throughout the years since, the OECD has endeavored to examine and improve the accuracy of these indicators. At present, CLIs are published for each of the OECD member countries, as well as for larger economic regions.

More concretely, the CLIs result from the collection of economic data released by the member nations, and thus, the figures calculated monthly are released about a month and ten days after the fact (e.g., a January number is usually released around March 10). We may wonder how effective leading indicators can be if the release of the number is delayed that much. The fact of the matter is that even though the numbers are released about a month and ten days late, the OECD CLIs still function as the leading indicators.

Because there are many CLIs corresponding to each OECD member nation and various regions, the question is which one of them is the most effective in forecasting the direction of the Japanese equity market. To my knowledge, the answer is the G7 OECD CLI, which was developed to predict the direction of the G7 economy. Table 1.1 lists the weight allocated to the G7 countries in the CLI and which time series are used for each country to calculate the monthly CLI.

TABLE 1.1 G7 OECD CLI component countries and weights, and time series used

Source: OECD

Country	Country Weight	Indices
USA	49.95%	Dwelling started
		Durable goods new orders
		Share price index
		Consumer sentiment
		Weekly hours of work
		Purchasing managers index
		Interest rate spread
Japan	13.98%	Inventories to shipment ratio
		Import/Export ratio
		Loans/Deposits ratio
		Monthly overtime hours
		Dwelling started
		Share price index
		Interest rate spread
		Small business survey
Germany	10.74%	Business climate
		Orders inflow/demand
		Export order
		Total new orders
		Finished goods stocks
		Interest rate spread
UK	7.51%	Business climate
		New car registration
		Consumer confidence
		3‐month eligible bank bills
		Production future tendency
		Finished goods stocks
		FTSE nonfinancial share price
France	7.30%	New car registration
		New job vacancies
		Consumer confidence
		Eonia interest rate
		Interest rate spread
		Production future tendency
		Industrial sector prospects
		Finished goods stocks
		SBF 250 share price index
		Terms of trade
Italy	5.95%	Consumer confidence
		3‐month interbank rate
		Production future tendency
		Deflated net new orders
		Order books or demand
		Terms of trade
Canada	4.56%	Deflated money supply
		Housing starts large cities
		US purchasing managers index
		Consumer confidence
		Interest rate spread
		Inventories to shipment ratio
		Share price index

The OECD homepage has a further and detailed description of this CLI, and the monthly time series since January 1959 can be downloaded here: https://stats.oecd.org/Index.aspx?queryid=6617#

A major word of caution is needed when using the time series, however: Investors need to use the deviation from the 1‐year moving average of the original time series. When the deviation is in a positive direction from the moving average, the market is a “buy,” and otherwise the market is a “sell.” This simple process is an amazingly effective formula in trading the Japanese equity market.

In the 25‐year period of September 1991 to August 2016, by hypothetically trading TOPIX futu...

Table of contents

• Cover
• Table of Contents
• About the Author
• Acknowledgments
• Preface
• CHAPTER 1: Macro Indicators and Seasonality
• CHAPTER 2: Policy Impact
• CHAPTER 3: Topics Derivatives
• CHAPTER 4: Market Tops and Bottoms
• CHAPTER 5: Other Market Movers
• CHAPTER 6: September 2017–December 2018
• Epilogue
• Index
• End User License Agreement