“The emergence of “Bitcoin wealthy” might ignite the “speculative spirit” of Japanese people with strong follower aspirations.”
While the wholesale disappearance of retail traders from stock markets is hardly a novel observation, it has taken on a whole new meaning in Japan, where the lack of carbon-based investors has prompted Deutsche Bank to ask if ” Japan’s stocks are still traded at all by humans.”
As Deutsche strategist Masao Muraki writes, since the US presidential election, Japanese stocks (in this case the TOPIX index) have been almost entirely defined by just three things: US stocks (S&P 500), the implied volatility (VIX), and USDJPY. This is shown in the model correlation chart below.
And while some observers think that foreigners are buying Japanese stocks on hopes for Abenomics following the Lower House election, this aspect is not apparent in the Figure above according to Deutsche. Instead, according to the German bank, it is the 10Yr US yields that determine relative performance of Japanese and US financial stocks most directly. Additionally, interest rates, forex, and option prices (implied volatility) are defining absolute share prices for Japanese life insurers and banks, as shown in the charts below.
Furthermore, while financial institutions delivered some surprises in earnings announcements and shareholder returns and major developments took place in bank and insurers capital regulations in 2017 too, Deutsche notes that it “cannot find any indications of active change in allocations to life insurers and banks by investors due to these factors.”
These observations prompt Deutsche to ask “a basic question”, namely ” whether the power of price decisions for Japanese stocks (particularly financial stocks) have shifted from people to algorithms or AI.” Some additional thoughts:
Shift to passive fund management has accelerated, partially due to the impact of the Department of Labor’s fiduciary rules, and the trading share of active funds, which follow decisions led by human, is declining. With reduced influence, active funds appear to be focusing on sectors with drastic fundamentals changes (such as technology sector). In fact, more than 70% of inquiries from overseas equity investors to our insurance, securities, and other financial sectors team in December were about SBI, which indirectly owns cryptcurrencies.
