A momentous month for Japan – here’s how it happened…

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November 2014 saw a number of significant economic events in Japan. As the repercussions of what is happening in Japan are likely to have consequences in financial markets around the globe, we provide here a short overview of these events and our interpretation of them.

Exhibit 1: Graph showing exchange rate US Dollar/Japanese yen (vertical (rhs) axis shows Japanese Yen per US Dollar) for the period from December 2013 to 26 November 2014 – and the dates of events affecting Japan’s economy between 31/10/14 and 26/11/14.
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Source BNPP IP/Bloomberg.

A. On 31 October – The Bank of Japan (BoJ) stunned financial markets by announcing the start of additional QQE (qualitative and quantitative easing). This involves a significant increase in the BoJ’s monetary base, from 60-70 trillion yen per year, to 80 trillion yen per year, as well as a tripling of purchases of Exchange Traded funds, and Japan real estate investment trusts.

B. Also on 31 October – The GPIF (Government Pension Investment Fund) announced a major revision of its asset allocation. As a part of this strategy, the fund will buy more local and foreign stocks, aiming to cut the share of Japanese bonds in its portfolio to 35% (previously the target was 60%). The aim of this change is to establish higher independency of the GPIF, broadening its assets and hiring investment professionals in order to push companies to increase their profits. This is a part of Prime Minister Shinzo Abe’s flagship policy, known as ‘Abenomics’. The objective is to boost Japan’s growth rate to 3% a year on a nominal basis and 2% on a real basis. At the moment this objective looks very ambitious.

C. 17 November – Data was published showing Japan’s third-quarter GDP was estimated to have shrunk for a second consecutive quarter (after plunging by 7.3% in the second quarter), by 1.6% quarter-on-quarter on an annualised basis (see exhibit 2 below for an overview if Japanese GDP). This data shocked financial markets which were reckoning with a 2.1% expansion of Japan’s GDP in the third quarter. On 8/12/14 the estimate was revised down even further to show that real GDP slipped 1.9% (rather than 1.6% as initially reported), due to a contraction in spending by businesses that was twice as severe as originally thought.

Exhibit 2: Japan’s GPD

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D. 18 November – Shinzo Abe, Japanese prime minister (pictured above), surprisingly (less than two years in to a four-year term, and with solid majorities in both houses of parliament) called a snap election. His decision to call new elections was prompted by his need for a new mandate following the change of taxation plan. Abe announced that the second stage of the consumption tax hike, due in October 2015, would be postponed for 18 months.

The return of the Japanese economy to recession underlines what a battle Shinzo Abe has on his hands to hit the economic targets he set on coming to power in 2012.

Under “Abenomics” the objective has been to boost Japan’s growth rate to around 3% per year on a nominal basis and 2% on a real basis in order to repair the government’s finances. This was to be achieved through the “three arrows” of flexible fiscal policy, accommodative monetary policy and long-term structural reforms.

The recent events in Japan have led to a very significant depreciation of the Japanese yen relative to a range of currencies (see Exhibits 3/4/5 below). For a number of Asian economies, developments in Japan exacerbate disinflationary pressures (perhaps partially explaining, for example, the recent rate cut in China).

Data published on 8/12/14 suggest that the depreciation of the yen was partly behind a higher-than-expected current account surplus of Y947bn in October. This is the highest (seasonally adjusted) current account surplus Japan has had since the earthquake in March 2011. A strong increase in revenues generated by tourism and the yen’s big fall (which as well as facilitating exports pushes up the value of investment income from abroad). This data helped financial markets absorb the blow of the downward revision to Japan’s third-quarter GDP.

Abe’s administration is pushing to make Japan a tourism-oriented country by improving both its infrastructure and its social structure (e.g. facilitating the use of credit cards) ahead of the 2020 Olympic games. Mr. Abe said in January that Japan aims to attract 20 million overseas visitors annually by 2020, double the amount of visitors last year. Abe also backs a push to have casino-style gambling legalised — a measure that could attract more tourists from other casino resorts.

Exhibit 3: Chart showing depreciation of the Japanese Yen (JPY) against the Chinese Renminbi (RMB) for the period December 2013 to 2 December 2014 (click on the image for a larger view).

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Source BNPP IP/Bloomberg as of 02/12/14.
Exhibit 4: Chart showing appreciation of different Asian currencies versus the Japanese Yen in 2014 (through 02/12/14)
4.jpgSource: BNPP IP/Bloomberg as of 02/12/14
Exhibit 5: Chart showing depreciation/appreciation of the Japanese Yen versus major currencies in 2014 (through 02/12/14)
5Source: BNPP IP/Bloomberg as of 02/12/14
Naruki Nakamura

Head of Fixed Income with BNP Paribas Investment Partners Japan

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