Moves in the past week by the Bank of Japan (BoJ) and Prime Minister Shinzo Abe’s government aimed at re-invigorating the country’s economy have failed to inspire investor confidence. They also appear to have also foreshadowed problems looming for other economies.
Govinda Finn, senior Japan analyst at Standard Life Investments, was blunt in his assessment: “Japan’s reflation experiment is on the rocks. If the credibility of the government’s macro-policy goals continues to seep away, holders of risk assets are unlikely to be rewarded.”
On Monday the BoJ said it would boost annual purchases of exchange-traded funds to ¥6 trillion ($59 billion) from $3.3 trillion, but left the pace of monetary base increase and the interest rate level unchanged. This followed Abe’s announcement of a ¥28 trillion fiscal stimulus package, including ¥7.5 trillion of new spending to start this year.
“It was quite a wide-ranging set of measures, but none of them were overwhelmingly compelling,” said Paul Markham, London-based fund manager at Newton Investment Management, part of financial services group BNY Mellon.
The most important take-away from the moves is the global significance of the shift from monetary to fiscal policy, he told AsianInvestor. Japan’s challenges – such as an ageing population and the limited amount of remaining monetary policy ammunition – are faced by a number of other developed markets.
Markham expects to see the shift of monetary to fiscal policy measures repeated elsewhere. “But it may not happen immediately,” added Markham, who manages global and regional equity portfolios.
Standard Life Investments’ Finn said Tokyo’s decision to supplement monetary policy efforts with greater fiscal stimulus raised the prospects of success. “However, this may be the last throw of the conventional dice. More drastic options would reverberate across the rest of the world.”
When it comes to equity portfolio positioning, the strength of the yen is a concern. The new measures are not set to have an inflationary effect, which has put renewed upward pressure on the yen, said Markham. The currency is hovering around 100 to the dollar, which is a crucial level, he noted.
“If it strengthens beyond 100 into the 90s, that would be taken as pretty negative for the Japanese market,” said Markham. This is because the Japanese stock market is heavily skewed towards exporters, which benefit which benefit when their domestic currency is weaker. HSBC expects the yen to strengthen to 95/dollar by the year-end.
Newton has been paring back its Japan equity exposure a little over the past few months as the yen has been strengthening. The firm is now broadly neutral on Japanese stocks at around 8% of the global equity portfolio and does not see any macroeconomic reasons to to take a top-down overweight stance at this point.
The BoJ is to review the effectiveness of its policies at its upcoming meeting on September 21. "This may raise hopes of something punchier [in terms of stimulus," said HSBC in a note on Friday. But the UK bank advised caution, arguing that the BoJ's relative inaction this time suggests it has "reached the limits of its current policy framework".