Hot Topic: Japan - this time it's different, no seriously!
As the first anniversary of the Great East Japan Earthquake passes, Japan is once again in the spotlight, however, this time it was a Valentine’s Day present from the Bank of Japan (BoJ) in the form of Japanese style quantitative easing that has elevated
Inflation targets were previously set at between zero and 2%, thereby implying that inflation at zero was tolerated. The latest decree is for inflation of 1% to be the new “goal”, and this, alongside the increased liquidity has led to renewed interest in Japanese equities, coupled with a slide in the currency. Against the USD, the yen fell more than 6% in a fortnight, boosting exporters as income returned to Japan is not diminished as much by a weakening home currency.
The recent announcements are significant changes of tack for both the government and the independent BoJ. With the current governor of the BoJ due for retirement in early 2013 there have been rumours that the BoJ could be stripped of its independence with the Ministry of Finance (MoF) taking control of both the fiscal and monetary policy in Japan. The threat of his legacy being the demotion of the BoJ should be sufficient encouragement for the governor to step up and deliver on his promises, in this case both increased asset purchases, as well as this inflation target. Coupled with the mid-February announcement was the revision up in January of the country’s economic outlook for 2012-13. This is in fact the first time since the bubble years that there has been subsequent supportive action following the upward revision again indicating that this time the BoJ and government together mean business.
Another catalyst for an improvement in policy is that the past 15 months has witnessed the ratings agencies taking the axe to Japan’s official credit ratings. With such a heavy reliance on domestic financing this has historically not been seen as a problem, however, Japan is beginning to realise that inflows from external sources will be the only long-term solution to its net debt burden, and so we can expect concerted efforts to protect the ratings from further downgrades. This change of thinking should result in a marked improvement in the corporate governance of companies, as well as a review of the relationship between company management and the shareholders. All of which should bode well for holders of Japanese equities.
Last years horrific events led many to believe that a turning point in Japan’s fortunes had been reached. Sadly, after visiting the region at the start of March, one can only report that efforts in the areas directly impacted have been largely led by those left behind, with the government’s pontificating reaching new lows. However, more recently the supplementary budgets signed off in late 2011 have finally been put into action, and expectations are that the rebuilding efforts in the north-east of Japan will contribute more than 2% of GDP in 2012.
Yesterday’s announcement from the BoJ that they are not going to extend the asset purchase program for a second consecutive month has disappointed over-optimistic market watchers, but was in-line with consensus estimates. However, there was some positive news with a further ¥2tn made available to support growth industries, as well as a one year extension to the repayment dates for loans dedicated to the reconstruction efforts in the disaster-hit areas. Also, we are looking for an improvement in the money lending cycle as corporates extend their demand for working capital, and consumption demand picks up, resulting in a boost to the domestic economy, particularly housing and consumer-discretionary stocks.
So whilst risks remain to investing in Japan such as will the BoJ deliver on its promises this time, we believe that with the current positive global demand outlook and the concerted efforts of both the BoJ and the MoF, the ducks are lining up for Japan to perform strongly through 2012.
