Japanese Economic Update – 03 November 2014

Downside risks to inflation force Bank Of Japan into action; GPIF dumps bonds, increases allocation to equities

The BOJ shocked markets globally last week when it leapt into action as a result of growing downside risks to the JPY inflation and growth outlook.   

In detail, the BOJ will increase its annual purchases of government bonds from 50 trillion yen, to 80 trillion yen. In addition to a higher rate of purchases, the bank will also extend the maximum time till maturity of its holdings from the current 7 years, out to 10 years.

These measures the bank expects to help support its quest to further increase the expansion of the Japanese monetary base, from current annual growth rate of 60-70 trillion yen, out to 80 trillion yen.

The BOJ’s decision came as a result of a split vote among the 9 policy makers on the committee, indicating that confidence in the ability of monetary policy to right the economy may be waning in some quarters.

Nevertheless, it is important for the Japanese economic revival that price pressures begin to recover and growth picks back up as the Prime Minister is expected to make the final decision in December on whether the second consumption tax increase will take place in October next year. The long standing plan has been for an additional increase to the tax from 8% to 10% in late 2015.

Without this the government stands little chance of being able to meaningfully reduce what is now the developed world’s largest sovereign debt pile, although the earlier increase in 2014 demonstrated that such moves are not without risks of their own.

This is as the 2014 increase was followed by a sharp drop in economic activity, and is widely believed to have been the catalyst that initiated a slow downward spiral in the nation’s inflation numbers, after a promising period where price pressures appeared to be trending gently upwards.  


GPIF gets the official go ahead for asset allocation changes, substantial flows into local and international shares expected

The BOJ’s policy announcement was not the only shock to markets emanating from Japan during the last week. This was as Thursday’s statement was followed swiftly by reports from Japanese financial media outlets that the GPIF (Government Pension Investment Fund), which holds $1.2 trillion of assets, has received the official nod from regulators to alter its asset allocation in order for it to meet the income requirements of future years.

From this year the fund will reduce its allocation to Japanese government bonds from 60% of AUM, down to 35%. The fund will also increase its exposure to both Japanese and international equities from the current threshold of 12% each, up to 25%. This translates into a $300 billion inflow to local shares and those of other developed markets.

The reports which emerged over the course of Thursday and Friday were a key driver behind the last minute rally seen across both European and North American stock markets.


Looking ahead

The week ahead sees Final Manufacturing PMI numbers for October released, along with average cash earnings figures for the recent month later in the week.

The BOJ governor is also due to speak at a regional meeting of central bankers where investors will be listening keenly for any signs of further policy measures to come during the months ahead,  

All in all, we believe that recent moves by the BOJ should help to drive Japanese markets to new multi decade highs ahead of the new year. In addition to this there are positive connotations for international markets in that approximately $300 billion of inflows to developed market equities can be expected from GPIF during the quarters ahead.

Further from here and as was pointed out earlier by our preferred external forecaster, Capital Economics; the swift and decisive action so early on from the BOJ now adds to pressure upon the ECB for it to leave the deck chairs behind and take meaningful action to support Europe’s flagging economies.

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