The surprise decision by the Bank of Japan to expand its monetary stimulus programme has provided a much-needed uplift to Japanese equities and a likely boost to the Asia-Pacific region.
On October 31 the Bank of Japan (BoJ) announced plans to further increase its monetary base expansion at a rate of ¥80trn (£440bn) a year, through the purchases of Japanese government bonds, exchange-traded funds and Japan real estate investment trusts.
The timing of the policy followed the publication of the Bank’s latest outlook on economic policy, which noted a weakness in the economy following the consumption tax price hike in April.
In its announcement the Bank emphasised that the qualitative and quantitative easing (QQE) programme would remain open-ended, stating: “The Bank will continue with the QQE, aiming to achieve the price stability target of 2 per cent, as long as it is necessary for maintaining that target in a stable manner.”
The stockmarket reacted positively to the expansion, with both the Nikkei 225 and the Topix indices rising almost 5 per cent after the announcement. But whether this upswing will persist remains to be seen.
Simon Somerville, manager of the Jupiter Japan Income fund, notes: “The timing of this policy took everyone completely by surprise, as most had been pushing expectations of a change in policy into 2015. This change in policy will increase expectations that Japan can get close to achieving its stated 2 per cent inflation target by the end of next year – a significant difference from the deflation problems elsewhere in the world. It is also a clear signal from the BoJ that it wants to see a real reallocation among domestic investors to more risk assets.”
Meanwhile, Tony Lanning, multi-manager of the JPM Fusion fund range, notes that should the expanded policy result in meeting long-term inflation expectations, the key beneficiary will be financial stocks.
But he adds: “While the resultant bounce in the Topix is pleasing, the investment case in Japan lies firmly in the corporate restructuring story, which continues apace. While most major equity markets can be considered fully valued, Japanese equities still offer significant upside.”
With Japan still one of the largest economies in the world and a large player in the Asia-Pacific area, a boost to the Japanese economy is likely to have a knock-on effect to the rest of the region.
The question, of course, remains whether this further step into monetary easing will help or hinder Japan’s economy.
Anna Stupnytska, global economist at Fidelity Worldwide Investment, says that while the move should be supportive to Japanese equities and bonds, it “doesn’t really solve the issue of low growth expectations over the longer term”.
She adds: “To improve medium-to-long term economic prospects, [prime minister] Abe still needs to step up his structural reform ambition, particularly at the time when the decision about the next consumption tax hike is looming at the end of this year while his political rating is taking a hit. If the next stage of the consumption tax hike does go ahead next year, we would also need to see a large fiscal offset to prevent this year’s economic scenario post tax. As always, monetary policy is not the only answer but it will keep markets pleased for now.”
Nyree Stewart is features editor at Investment Adviser
CURRENCY VIEW
Chris Towner, managing director of FX advisory services at HiFX, says:
“Japan surprised the market by increasing its quantitative easing programme, which involves pumping more and more cash into the economy. However, the biggest shock linked to this news was that the Bank of Japan was already pumping ¥60-70trn (£330bn-£395bn) into the economy.
“This was already a quantitative easing programme on steroids in relation to the size of the Japanese economy and already outweighed the QE programme in the US when it was running at full steam. Now the Bank of Japan has increased this to ¥80trn and has made its inflation target open-ended rather than a target that needed to be reached within two years.
“The reactions in the markets have been one of shock and awe with the Japanese yen weakening by its largest margin in 1.5 years. Central banks and monetary policy continue to gyrate the foreign exchange markets as though they are playing chicken with each other as to who can be the boldest in terms of monetary policy.”
