Earlier this week, the Bank of Japan adopted a new policy framework named “QQE with yield curve control”.
The central bank announced it would continue to expand the monetary base until Japan’s economy achieves stable inflation in excess of 2 per cent.
The tools the Bank of Japan will employ to achieve its goals remain the same, but with some refinements.
Asset purchases remain targeted at Y80 trillion per year but will have some short-term flexibility to allow the Bank to attempt to control the shape of the yield curve.
The Bank also decided not to deepen negative interest rates at the September meeting.
The adverse reaction in financial markets from the move into negative rates and the detrimental impact on banks, from narrower spreads, and on corporates, from increased pension fund obligations, may have played a part in the Bank’s decision.
The Japanese market rallied strongly following the Bank of Japan’s announcement as investors reacted positively to a shift in the central bank’s monetary policy framework.
The broad-based Topix advanced by 2.7 per cent in yen terms, with shares in banks and insurers surging as the central bank refrained from cutting interest rates deeper into negative territory.
Fund managers were swift to reveal what they think this move will mean for their Japan-focussed funds.
So, what can investors expect from Japan-focussed funds moving forward? This is what fund managers have to say:
Volatility in other markets
Nicholas Wall, co-manager of the Old Mutual Global Strategic Bond fund, said the Bank of Japan’s action is tapering but with asset purchases no longer the independent variable in the policy mix.
Mr Wall said: The global pool of liquidity is unlikely to keep on increasing at the current pace so the ‘hunt for yield’ trade looks less attractive.
“The Bank of Japan announcement that it will target the 10-year should suppress local yield curve volatility, but could lead to volatility in other markets and asset classes.”
Positive for financial sectors
Hiroyuki Ito, manager of the Fidelity Japan fund, said the Bank of Japan’s decision to keep its short-term interest rate unchanged and steepen the yield curve is definitely positive for financial sectors such as banks and insurance.
Mr Ito said: “I continue to focus on companies that can create and dominate new markets through the introduction of new services or products.
“The Bank of Japan’s decision will not affect my stock picking criteria. In terms of financials, I remain neutral overall as the underweight exposure to banks is offset by holdings in non-banks and insurers.”
Japan clearly needs more than QE
Adrian Lowcock, investment director of Architas, said the policy announcements suggested the Bank of Japan was running out of tools.
He said: “Raising inflation targets to above 2 per cent is vague and a significant departure from central banks previous approaches. After three and a half years of failing to boost inflation it is a big bet on the Bank’s credibility.
“Increasingly markets believe we have reached the limits and effectiveness of monetary policy and are looking towards governments to boost growth through fiscal stimulus.
“Japan clearly needs more than QE as the money isn’t getting into the real economy and has had no effect on inflation. In particular significant structural reform is needed to support smaller businesses and create a more flexible labour market.
“The outlook for the country is rather mixed. The valuations and earnings of Japanese shares remain attractive relative to global equities but investors remain sceptical of Bank of Japan policy decisions and the strong Yen remains a significant headwind for the country.”
Helicopter money in all but name
Trevor Greetham, head of multi-asset at Royal London Asset Management, said the authorities are going down the route of explicit financial repression, boosting nominal growth while keeping interest rates near zero at all maturities.
He said the idea is to transfer wealth from savers to borrowers, the government included, to reduce debt burdens and wipe the slate clean.
Mr Greetham said: “This is helicopter money in all but name and it is supportive of our overweight stance in Japanese equities.
“Japan has been suffering from excessive debt and deflationary pressure for longer than any other developed market, so we should watch new policy developments in Tokyo with interest.
“If growth turns downwards, the new framework allows Japan to make short rates more negative, increase the monetary base and expand government spending without needing to worry about the markets.”
Bought a little time from markets
Alan Wilde, head of fixed income for global at Barings, said the Bank has bought a little time from markets by introducing a new form of policy accommodation to lock down both short and longer term rates and bond yields.
Mr Wilde said: “Given the existing scale of their engagement with the bond market through Rinban operations, this move towards price targeting (0 per cent 10-year bond yields) and away from quantitative easing ($780 billion p.a.) will likely be effective in the short term.”
Earnings growth is likely to remain subdued
Paul Chesson, head of Japanese equities at Invesco Perpetual, said with core inflation currently negative, the Bank of Japan’s target remains a distant prospect.
He said economic data continues to reflect an uneven trend and any sustainable improvement will depend as much on global conditions as on domestic policy.
Mr Chesson said: “For equities, valuations for the Topix index are not expensive relative to history or to other global markets but earnings growth is likely to remain subdued and sensitive to the exchange rate, with many companies still using significantly weaker yen assumptions than current levels.
“Corporate earnings and valuations will remain the long-term drivers of the equity market, but in the short term it may be dominated by monetary and fiscal policy developments as well as a divisive US presidential election and the potential for additional tightening from the US Federal Reserve, both of which have global implications.
“What is clear for now is that Bank of Japan policies have been a consistent theme in Japan’s financial markets for more than three years and following the Bank’s assessment of its QQE and negative interest rate policy it is likely to remain so for some time to come.”
