Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

JAPAN: A NEW WAVE OF POLICY INTERVENTION?

Since the beginning of the year, macro conditions in Japan have remained quite weak. We expect that Japanese GDP will grow by 0.6% YoY in the current year 2016, and around 0.5% YoY in 2017, under a Low Low Trap scenario. Our scenario has been adjusted downward for a stronger yen than previously expected. The trigger for a stronger yen has been the “new” risk environment (global higher uncertainty) induced by the UK referendum.

Matteo Germano
Matteo Germano

A stronger yen is expected to hit economic performance in Japan mainly through Profits/Capex and Net Trade. Moreover, it’s going to add concern with respect to Corporate Profitability that appears to have already peaked, especially with external demand far from buoyant.

The inflation outlook has marginally deteriorated since the beginning of the year: although the path in H2 remains upward, we expect inflation around 0.5% YoY by the end of 2016 and marginally increasing in 2017. Inflation will remain far below the BoJ target until the next planned Consumption Tax hike in 2019.

Looking forward, Japan is still waiting for more proactive and supportive policies to fix its conditions.

The last elections for the Upper House, on the 10th of July, saw First Minister Abe’s coalition (LDP plus Komeito) gain additional seats. This outcome takes the country in an even more stable political direction and sets the stage for more decisive action on some sort of intervention such as the fiscal package. A discussion on a substantial fiscal stimulus is under way

On the monetary policy side, the BOJ continues to support financial markets by injecting vast incremental amounts of yen liquidity into the system. The 2% inflation target has become a medium term target, with the BOJ currently vowing to reach it in fiscal 2017, but admits that “the risks are high for reaching the CPI target in the timeframe”. The BOJ at the July 29 meeting increased the purchases of ETFS from 3.3T to 6T a year, leaving interest rates and JGP purchases unaltered: the increase in the qualitative easing was motivated by Brexit and the slowdown in emerging markets. An assessment of the effectiveness of the BOJ’s current stimulus policies is scheduled for September, and could well lead to the implementation of further policies. In fact, further stimulus may be enacted by the Kuroda led BOJ in coming months if needed, in the goal to achieve the 2% CPI target “as soon as possible”.

chart

In a more international context, Abe is ready to ratify the Trans-Pacific Partnership deal (TPP) because of its relevance to Japan’s internal reform process. In fact, in the agriculture sector, the deal could force a kind of revolution towards a more competitive and productive way to operate. Vested interests in the sector are strong and Abe could take advantage of an external input rule to engineer big changes. However, the entire deal is stuck, waiting for the US signature that is becoming more and more caught up in the presidential election campaign.

From an investment perspective, we keep a very moderate preference for Japanese Equity. The strong JPY appreciation, further triggered by Brexit, could have a negative effect on Japanese corporations. However, a new wave of policy interventions could support the market in the short term.