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Japan debate intensifies after Nikkei rally
Can Japan's stock market gains of recent months translate into an enduring market and economic recovery?
Perhaps the harshest warning you can level about an economy, the one governments, central bankers and investors dread, is that it is sinking into a ‘Japanese-style’ funk.
The world’s third-largest economy, having been overtaken by China recently, has been the perennial investment disappointment.
Two ‘lost decades’ have provided plenty of time to prophesise new beginnings. But after many false starts, and a year after the devastating Tohoku earthquake, stock market gains so far this year – at 10,123 the Nikkei is up 15% – are waking investors from their deflation-induced slumber.
Japan’s stagnant and deeply indebted economy, which was hit so hard by last year’s earthquake as well as the Asia-wide impact of floods in Thailand, is starting to show signs of life. The central bank surprised markets last month by extending its asset purchase programme in a move that according to Jonathan Ruffer and his co-managers of the Ruffer Investment Trust ‘gets a hungry investor’s saliva glands working’.
The Bank of Japan has increased its quantitative easing (QE) asset purchase programme to ¥65 trillion (£490 billion) from ¥55 trillion. It has also announced a new inflation ‘goal’ of 1% year-on-year change in a bid to defeat its long-standing enemy: deflation.
‘Given that companies and investors in Japan have become so accustomed to falling prices, the effect of a small amount of inflation could be dramatic; a growing top line will quickly reveal the cheapness of companies that have been cutting costs and prices for years,’ commented Ruffer, whose investment trust (a Citywire Selection Star Pic k ) includes a 23% bet on Japanese shares, in his latest update to investors.
But, as Ruffer acknowledges, we’ve been here before. Jaded investors simply don’t trust the Bank of Japan. There are concerns that the Bank was acting in response to political pressures; though bank governor Masaaki Shirakawa has since said bending to politicians would be ‘suicide’.
Then there are worries that the Bank simply won’t deliver on its promises. ‘Investors are still very wary indeed about whether the Bank will follow through,’ said Andrew Milligan, head of global strategy at Standard Life Investments and a long-time Japan watcher.
Jane Andrews, fund manager at Smith & Williamson, adds that the Bank is setting woolly inflation ‘goals’ rather than the more concrete ‘targets’ pursued by other countries.
Weak currency, strong exporters
Whether or not they’ll help in the long term, hopes that the Bank will continue to stimulate the economy have provided a much-needed adrenaline shot.
A strong yen has long hampered the Japanese economy, making it difficult for companies to recover from last year’s disaster, but hopes of more stimulus have weakened the currency, which hit an 11-month low against the dollar on Thursday. This has helped Japan’s blue-chip exporters, making their goods more affordable to foreign buyers, with the benefits reflected in the Japanese stock market’s rise.
Further declines are needed. But the weaker yen is a boon for Japan’s already strengthening global companies, which have been praised for their rapid recovery from the tsunami that ravaged Japan’s north-east coast. ‘Corporate earnings have shown, and are further expected to show a significant recovery during the year. Corporate Japan continues to advance as historically high levels of free cash flow continue to be generated and returns have bounced back following the disaster,’ Shogo Maeda, head of Japanese equities at Schroders, recently told Citywire.
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