Japanese Economic Update – 06 April 2015
NIKKEI remains buoyant, breaks through to a 15 year high in April
Like many of its global counterparts, Japan is beginning to see the gains made toward its inflation target in 2013 and 2014 ebbing away as disinflation becomes embedded across the industrialised world. While much of this deceleration is the result of a collapse in oil prices, for Japan, falling inflation is a particularly pertinent issue given the nation’s experience during the last two decades.
However, some policy makers are now beginning to show signs of favouring a more flexible approach when it comes to the nation’s inflation target, which we believe is actually a net positive for the Japanese economy.
We say this because when the current inflationary picture in Japan is contrasted against that of the UK, the US and the European economies; it becomes apparent that there is no real difference in price pressures across all of the major industrialised nations.
The only potential exception to this rule is the euro region, where some nations are actually struggling against genuine deflationary conditions (particularly Greece), while the bloc as a whole has been balanced dangerously upon the edge of a fiscal and monetary precipice until quite recently.
However, the ECB’s intervention in January appears to be having the desired effect in that asset prices are now rising, confidence among the business community is showing tentative signs of recovery while in some segments of the continent, growth has genuinely begun to rebound (Sweden, Spain).
With this and the likely impact of the 2014 reduction in oil prices upon an import heavy Japan in mind, we remain optimistic in our outlook for the world’s third largest economy.
Looking ahead, we view the reduction in oil prices as a net positive for Japan, one that should alleviate the burden of high energy import costs and in doing so; effectively provide a real terms increase in disposable incomes.
Moreover, we do not subscribe to the view that “second round” disinflationary effects will eventually lead to the same pressure that was seen in the headline measure filtering through to core inflation across the global economy during the coming quarters.
Although a certain amount of downward pressure is to be expected, we do not believe that it will be of a similar scale to that seen in the main CPI index, mostly because we find it difficult to envisage global corporates as being willing to compromise further on existing margins any time soon.
Therefore, we expect to see greater stickiness in core consumer prices (ex energy and food) during the quarters ahead.
With this in mind, we view the core challenges facing Japan over the medium term as being centred around fiscal reforms and nominal wage growth, while in the short term the economy should draw support from an “effective” increase in disposable incomes and continued loose monetary policies across much of Europe and Asia.
The performance of Japanese equity markets has been strong so far into 2015, with the NIKKEI up by 13.4% YTD, after having reached a 15 year high in early April.
Although some of this performance has been the result of stronger corporate earnings and the economy’s return to growth, investors also need to consider the influence of monetary policy expectations too.
It is difficult to decipher exactly how much of the NIKKEI’s gains are the result of expectations that the BOJ will spring into action once again later this year, however; we still believe that the bar to further monetary easing is set quite high in Japan.
This means that there could be some risk of disappointment later in the year, which may prove to be the catalyst for a minor correction, particularly in the event that economic growth surprises on the upside throughout Q1, Q2 & Q3.
Having said this, we are also reasonably optimistic in our outlook for earnings in corporate Japan and for this reason, we believe it remains likely that the NIKKEI will close the year having held on to most of its gains.
NIKKEI 225 / 8 Hour Intervals
NIKKEI 225 / Monthly Intervals
NIKKEI 225 / Monthly Intervals
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