A month of surprises for Japan

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Paul Niven, head of Multi-Asset Investment at F&C Investments, provides his views on the Japanese economy.

On the decision by Haruhiko Kuroda, the Governor of the Bank of Japan, to increase the annual target for the stimulus programme to 80 trillion yen, from 60 to 70 trillion yen, in October, Paul Niven, said:

“Whilst it had been anticipated that a cranking up of monetary stimulus was likely at some point, the timing, together with the fact that there were no hints ahead of the announcement, caught most off guard.

“The surprises continued through November with economic releases showing that the Japanese economy had contracted in the third quarter to put the country back into a technical recession.

“GDP had been expected to post modest growth, following the steep downturn in the second quarter, and just a day later Prime Minister Abe called a snap election, two years ahead of schedule, with voting scheduled for mid-December. At the same time Abe announced that the second planned hike in the consumption tax, originally scheduled for October 2015, would be delayed.

“More monetary stimulus sent the yen tumbling and pushed the Nikkei 225 Index to its highest level since 2007. Although support for the Prime Minister has waned somewhat recently, his popularity remains high and the expectation is that Abe will win the elections comfortably over an opposition which is in a poor state. This will give him a full four-year term to continue to implement his reforms, labelled ‘Abenomics’.

“Despite the poor GDP numbers, the weaker yen and falling commodity prices, together with more aggressive monetary stimulus is expected to benefit Japanese companies which have recently posted strong profits growth. Any uncertainty which does creep in prior to the elections is unlikely to last long – timescales are short and markets are likely to take renewed confidence from a reconfirmation of Abe’s leadership – the most probable outcome.”

Asset Allocation Summary

  • We remain positive on Japanese equities and maintain our overweight but are mindful of potential further weakness in the yen
  • Where we have made a change to our view on equities is with regards to European stocks, where we have moved from underweight to overweight. This reflects our short-term positive view for equities due to better macro data
  • We have moved further underweight in developed and global sovereign bonds, as Government bond yields have fallen and have not reacted to the improved macro data we have seen
  • Credit spreads have not enjoyed the big recovery seen in equity markets since the middle of October, therefore we have reduced our overweights in global high yield and emerging market debt and moved from neutral to positive on investment grade credit

Outlook: “The timing, and impact of US interest rate hikes in 2015 remains the big question, as macro data improves but looser monetary policies in major economies other than the US cloud a clear path forward. Equities are likely to remain our preferred asset class through to at least the start of 2015.”


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