Japanese Economic Update – 22 September 2014

OECD official urges action on JPY inflation target, government revises down economic outlook

The NIKKEI rose last week, largely off the back of a stable policy outlook in the US and positive sentiment emanating from Europe in response to the “No Vote” from the Scottish people.

In addition to North American and continental drivers a slightly more downbeat economic assessment from the government also bolstered bullish sentiment driving Japanese equities as investor’s expectations for further stimulus from the BOJ during the months ahead gained momentum.

Such expectations were further supported when OECD Acting Chief Economist Rintaro Tamaki openly called for the BOJ to rethink its current policy stance in light of waning momentum behind inflation numbers.

Current forecasts for this week’s Japanese inflation numbers imply slightly weaker price growth in durables and energy. Should these numbers underperform against consensus estimates then voices for further action from the BOJ could grow louder during the final months of the year.

Our outlook for Japan remains very much the same as in our previous update. This is that while the economy continues to remain on a largely stable footing, the threat that growth and price inflation slows during the months ahead is a credible risk to the BOJ’s mantra of an upbeat view of the economy.

With persistent weakness in both exports and, to a degree, consumption; we expect weaker inflation to force the BOJ into action during the final stages of 2014 or the opening months of 2015. This will no doubt be positive for equities in Japan. Consequently, our outlook for investors in JPY shares remains positive.

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