Notes From Underground: Kan faces a big test within the DPJ–can he remain prime minister?

The biggest story from the weekend was the release of the Chinese trade numbers and surprisingly the export component rose 44 percent year-over-year, while the imports slowed resulting in an increase in the trade surplus.We know that this will not play well in Washington and will provide fresh fodder for the protectionist drumbeat that is looking for more participants to march along.

As our readers know, we look at all Chinese data with a jaundiced eye but this release piques our interest and makes us wonder how it will play in Peoria. If Chinese exports are growing, does that indicate that there is more global growth than previously thought? Those exports have to be going somewhere and there must be demand for them. If the demand is based in the emerging markets, that is a good thing because it indicates that domestic consumption is increasing where it needs to. If the peripheral nations are indeed growing, that is the start of what is needed to begin correcting the global imbalances. Growth in the peripheries will mean increased infrastructure projects, which will create demand for companies like Caterpillar. While Washington will be aroused, Peoria may well find great opportunities. It is way too early to see anything of impact but just shows the need to look well beyond the headlines.

Also on Friday, the market received the Canadian employment number and it was a blowout positive number. The consensus called for 18,000 job growth and the actual number was 93,200 and the unemployment rate dropped to 7.9 percent from 8.1 percent. This number was strong and would usually be a positive for the U.S. as the Canadian data has historically been indicative of U.S.growth. But we wonder why Canadian growth has not been leading to a U.S. growth story. As we analyze the data, it is apparent that the Canadian firms highly correlated to the U.S. are not performing as well. In addition, much of the growth is based in energy and natural resource sectors, thus another indication of better demand coming from other regions of the global economy. Bloomberg News noted that Canada was the first of the G-7 nations to return to employment numbers from October 2008. The fact that Canada has a much smaller DEBT load, both public and private, has meant that domestic demand is not encumbered by overstretched consumers. In addition, Canadian banks are probably in the best condition of any nations, so there are benefits to doing it right.

Sunday in Japan meant elections for the upper house of Parliament and the ruling DPJ suffered a letdown in its popularity. The ruling party was expected to attain 55 seats, which would have given it an ability to exercise the legislative agenda it wants. The fact that the DPJ lost seats (present projections are 46  of the 121 for election), means they will no longer command a majority in the upper house, which has the ability to delay or block legislation passed by the more powerful lower house. The result may be that Naoto Kan, the recently appointed prime minister, may lose his position and the DPJ finds itself in chaos. Some analysts think that the DPJ’s poor showing is due to the fact that KAN has pushed forward the idea of increasing the VALUE ADDED TAX to 10 percent by 2013 in an effort to begin reigning in the massive government deficit.

Japanese voters appeared none too pleased by this suggestion and whatever party governs it will have to review what policy tools are in its chest to begin to curb the massive fiscal deficit. Japan is nervous as it has watched how sovereign deficits can create great pain for the profligate. Japan is in dire need of real leadership that can set an achievable agenda. Even though the DPJ has been dealt a setback, it can regroup and begin to really lead.

The YEN is lower as we write, but we are not sure what the election results really bode. Prime Minister KAN has been on the record of wanting a weaker YEN so if he is replaced we don’t know what the alternative policies would be. We know that while KAN has desired a weaker YEN on his watch, it has rallied so the prime minister wishes may be only that. Market forces outweigh wishes, especially when those forces are BOND purchases by the central bank of China. If the Chinese retreat from the Japanese markets, the YEN will most likely weaken. We await further news and market action.

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