Bank of Japan makes surprise easing
The Bank of Japan’s decision to expand its monetary easing programme comes as a big surprise, which – conveniently – coincides with this week’s Fed decision to end its QE. This should be supportive to Japanese equities and bonds, and we could see the yen weaken even further.
As for the wider economy, this doesn’t really solve the issue of low growth expectations in the longer term, which is the main reason behind the negative real wage growth, sluggish demand and investment. In the meantime, the yen weakness could coincide with stronger external demand, boosting exports and helping growth and inflation in the next couple of quarters. But to improve medium-long term economic prospects, 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 the markets pleased for now.
Anna Stupnytska is global economist at Fidelity Worldwide Investment