Happy Halloween from Japan

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Simon Somerville manager of the Jupiter Japan Income Fund, comments on the combined move by the Japan Government Pension Fund (GPIF) and the Bank of Japan to boost appetite for risk assets and achieve the bank’s stated 2% inflation target.

“Today the GPIF, Japan’s government pension fund and the Bank of Japan (BoJ) surprised the market with significant changes in policy and treated investors to a near 5% rise in equity prices. First the GPIF were rumoured to be increasing their domestic equity exposure to 25% and lowering their domestic bonds to 35%.

Then, 90 minutes before the close the BoJ surprised everyone by announcing a ¥10-20tr increase in their monetary base target growth to ¥80tr, trebling their purchases of exchange-traded funds (ETFs) and real estate investment trusts (Reits), increasing the amount of Japanese government bond (JGB) purchases to ¥80tr from ¥50tr and raising the duration of JGB purchases to 7-10 years from seven years. This treat caused the market to surge 500 points into the close and the yen weakened to 111 vs the US dollar.

“The timing of this policy move was a complete surprise to everyone as most had been pushing expectation of a change in policy into 2015.This change in policy will increase expectation that Japan can get close to achieving its stated 2% inflation target by the end of next year – a significant difference from the deflation problems elsewhere in the world. It is also a clear signal from the BoJ that it is wants to see a real reallocation amongst domestic investors to more risk assets.

“It is not just monetary stimulus in Japan though as the earnings season has been another positive factor for investors; with about a quarter of companies having reported, we have seen profits up 16.5% versus the same period a year ago. This figure is 4.4% higher than expectations.  We also have seen a marked increase in dividends and share buybacks.

“So a Happy Halloween from Japan.”

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