Lombard Odier: We are overweight in Japanese equities

Homin Lee, Regional Economist for Asia at Lombard Odier answers a Q&A on why the company is overweight in Japanese equities and maintains significant USD exposure in our Japanese yen accounts.

What do you expect today?

We expect the Bank of Japan (BOJ) to introduce a new dovish policy innovation tomorrow. Ideally, the BOJ should expand its asset purchases (by JPY 10 trillion per year) and reiterate its commitment to reach 2% price stability target by the first half of 2016.

We believe that the probability associated with this scenario is still substantial. It is possible, however, that the bank decides to maintain the current pace of asset purchases but tries to boost its impact by hinting that it might expand the asset purchase programme in the near future or by introducing qualitative adjustments such as more explicit calendar guidance or a shift in favour of private sector assets.

Negative interest rates could be introduced for excess reserves, but we assign low probability to this outcome in light of the BOJ Governor Kuroda’s recent comments against it. In either case JPY will likely weaken further and Japanese equities will get fresh support.

Inaction at this juncture, however, will be detrimental to the bank’s credibility since domestic inflation has little chance of reaching the bank’s target in the its promised timeframe without any additional policy boost.

What is your view on the apparent push-back against additional easing by Finance Minister Aso and Abe advisor Hamada?

We acknowledge that the cabinet’s support for monetary easing might not be as strong as it used to be at the onset of Abenomics. This is due to the fundamental political difficulty of selling the gradual erosion of real income to aging voters (0.5% potential growth and 2% inflation target point to this outcome).

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