Andrew Rose, Fund Manager, Japanese Equities
Japanese equity investors were spoilt today in terms of relevant newsflow: the peak day in terms of interim results releases, confirmation of the Government Pension Investment Fund’s (GPIF) new asset allocation targets and an announcement by the Bank of Japan (BoJ) of a substantial expansion of its asset purchase programme (Qualitative and Quantitative Easing). It was the last of these which was responsible for Friday’s 4.3% rise in the stockmarket and 2.2% fall in the yen relative to the US dollar.
The move by the central bank was a surprise more in its timing than content. The consensus, supported by BoJ Governor Haruhiko Kuroda’s public pronouncements as recently as this week, was that the policy would remain unchanged for the twenty-second BoJ meeting in succession. What materialised was a downgrading of the BoJ’s growth and inflation forecasts, the announcement of a significant increase in the quantity of Japanese government bonds (JGBs), ETFs and J-REITS being bought, as well as an extension of the remaining maturity of its JGB portfolio and a commitment to conduct this new policy in an open-ended fashion.
The justification for the apparent abrupt about-turn (on a split 5 to 4 vote) was delays in changing Japan’s deflationary mind-set against the background of weaker-than-expected economic performance following April’s consumption tax increase and the recent fall in commodity prices.
Will it work? On a simple flow of funds basis, the move is likely to flatten the yield curve even further, support equity prices and possibly weaken the currency, although in real effective terms the yen is already trading at record lows. Sceptics will point to the fundamentally high-risk nature of this policy and question why an extension of what was started in April 2013 will be more effective now than it has been so far.
Conspiracy theorists will notice the coincidence of an announcement of a reduction in the GPIF’s bond portfolio with an extension of the central bank’s bond purchasing programme. They may further conclude that central bank is, in part, laying the groundwork for Prime Minister Abe to decide to proceed with the second increase in the consumption tax.
Keith Wade, Chief Economist & Strategist
In a beautifully co-ordinated move, the BoJ has stepped up asset purchases just as the US Federal Reserve brought down the curtain down on its own quantitative easing (QE) programme. Japanese policymakers narrowly voted to target a JPY80 trillion expansion (JPY60 – 70 trillion previously) to the monetary base by buying more JGBs, ETF’s and REITs. Investors fearing the end of QE in Washington can now look to Tokyo for succour.
As an added seasonal treat, the massive government pension fund (the GPIF) announced an increased allocation to equities. Whilst the Japanese equity market has rallied and the yen has fallen on the news, it follows a period of disappointing growth during which it became increasingly clear that the central bank would not hit its inflation target. Underlying inflation is running at just 1% once the impact of the consumption tax is stripped out, well short of the 2% targeted by policymakers.
We have been anticipating such action for some time as we always had doubts about the economy’s ability to withstand the increase in consumption tax. Although household wage growth had picked up, it has not accelerated sufficiently to offset the tightening of fiscal policy and as a result, households in Japan have experienced a fall in real income. Against this backdrop, consumer spending could not possibly lift the economy back to a growth rate which would generate inflationary pressure. Trade growth has also disappointed despite the fall in the yen, no doubt in part related to the slowdown in China.
Looking ahead, these headwinds are likely to persist: another increase in the consumption tax is slated for next October and growth in Japan’s major trading partner is likely to remain sluggish. However, as demonstrated today, when it looks like targets are being missed the authorities will step up action. The answer to any doubters on Abenomics is more Abenomics!