Japan’s monetary policy may provide tailwind to European stocks and bonds, says BlackRock’s Krautzberger
Michael Krautzberger, BlackRock’s head of European fixed income, says the evidence since April points to support for equities and bonds around the world as a result of Japan’s unprecedented monetary policy and inflation target.
4 April, 2013 will go down as a key date in the history of monetary policy. That was the day on which the Japanese central bank’s plans hit the headlines. The bank wants to achieve an inflation rate of two per cent within two years in order to finally overcome deflation. It intends to achieve this by purchasing assets worth 50 billion Yen (around 390 million euros) per year; previously, the figure had been some 25 billion Yen per year. In order to reduce real interest rates at the long end, the intention is that the average term of Japanese government bonds held by the Bank of Japan should increase from three years to six or seven years.
By adopting a programme of this nature, the Japanese central bank is setting new standards. While it may be true that the planned level of annual asset purchases is in the same ball park as that of the US Federal Reserve, it is, however, significantly higher when viewed as a proportion of gross national product, given that Japanese GNP was only about a third of the USA’s in 2012.
Against this backdrop, reactions in financial markets have hardly been surprising – both the yen and the Japanese stock market have reacted significantly with the Nikkei benefitting from the weaker yen. At the same time, while nominal Japanese government bond yields have risen back – real yields are still significantly lower due to higher inflation expectations. The consequences of Japan’s new monetary policy have also been felt outside Japan – yields on long-term government bonds have also fallen both in Europe and in the USA. This is based on the expectation that, in the light of the lower real returns available at home, Japanese investors will invest more heavily overseas.
The first government bond markets to profit from this will be liquid markets that offer a yield premium above German government bonds – especially the French and Dutch markets, for example. In the medium term, however, these capital inflows should have a positive effect on corporate bonds and higher yielding government bonds. To this extent, this expansive policy measure on the part of the Bank of Japan should also have an expansive effect on the eurozone.
Other European asset classes will also benefit indirectly, especially if they can provide attractive cash flows. At the end of 2007 two thirds of regular income in the global capital markets (when measured against general stock market indices) was accounted for by the fixed income sector. The proportion nowadays is 49% – the remainder comes from dividend distributions. So Japanese investors might end up providing some tailwind to European dividend-paying stocks as well as to European bonds. Investors should ensure that they take advantage of these effects, having due regard to diversification.