November 4th, 2014
Elusive recovery- 4 November 2014
Japanese equities lurched higher last week on the announcement of a fresh round of monetary stimulus from the Bank of Japan. Something of a high point in an otherwise lacklustre year for the asset class, the move could nevertheless be viewed as a tacit acknowledgement by policymakers that their efforts so far are not working. So does this make Japan a more or less compelling place to invest? The immediate reaction to the surprise news that Japanese policymakers had narrowly voted to add a further ¥10 trillion (£57bn) expansion to the monetary base by buying more domestic government bonds, exchange-traded funds and real estate investment trusts was overwhelmingly positive. On 31 October 2014, the Nikkei 225 index rose 4.3% while the yen dipped 2.2% relative to the US dollar. “The Japanese equity market – in common with eurozone equities – has been a notable laggard since the start of the year.” The boost was much needed. The Japanese equity market – in common with eurozone equities – has been a notable laggard since the start of the year and the country’s unprecedented quantitative easing programme has so far failed to ignite its economy. The central bank has not hit its inflation targets to date – underlying inflation is running at just 1%, once the impact of the consumption tax is stripped out, according to Keith Wade, chief economist at Schroders, which is well short of the 2% targeted by policymakers. If consumption tax is factored in, the figures look even worse. The Japanese economy contracted 1.8% in the quarter to June on a quarter-on-quarter basis, according to Trading Economics. Private consumption, which accounts for about 60% of the economy, declined 5.1% as households reduced their spending. Despite the market’s enthusiasm for the Bank of Japan’s move, experts remain sceptical. According to Andrew Rose, manager of the Schroder Tokyo Fund, while the move is likely to flatten the yield curve, support equity prices and weaken the currency, sceptics will say the policy is high-risk and has not been particularly effective to date. Nevertheless, Russ Koesterich, BlackRock’s global chief investment strategist, points out there are other factors that should support Japanese equities – for example, Japan’s Government Pension Investment Fund, the world’s largest pension fund, has committed to doubling its allocation to domestic stocks, from 12% of its portfolio to 25% and he believes other Japanese institutions are likely to follow suit. The recovery of the Japanese economy still appears elusive. Quantitative easing may still turn out to be beneficial but it has done relatively little so far. As ever, Japan remains a market where it is necessary to pick the right moment to invest and, at present, there appears little to suggest a longer-term revival.