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What next for Japan?
Japan has been under the spotlight this week, as investors waited with bated breath for the outcome of the first Bank of Japan (BoJ) meeting under its new governor, Haruhiko Kuroda.
For investors in Japanese equities the outcome was better than most anticipated; on Friday the Japanese stockmarket hit multi-year highs and gained as much as 4.5% before settling back, as traders responded to the BoJ's aggressive monetary easing measures that will aim to end more than two decades of deflation in the Japanese economy. It is hoped that Japan will meet its 2% inflation target in as little as two years.
However, Brian Jackson, global FX strategist at Coutts, is sceptical about whether this target is likely to be met. "[The] announcement represents a clear effort to convince investors that policy will be implemented forcefully in the attempt," he says, pointing out that the yen has already weakened on the news, from ¥93 to ¥95.6 per dollar, while the Nikkei 225 has recovered to pre-financial crisis levels.
The BoJ's monthly stimulus will now be of a similar size to that of the US Federal Reserve. "The key difference is that a similar amount of money will be supplied in an economy of about a third the size of the US," says Antypas Asfour, FX strategist at IronFX. He thinks the real challenge for Kuroda will be ensuring the benefits of this stimulus are felt by workers, "through higher wages that will increase the marginal propensity to consume".
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says that as well as increasing quantitative easing to the equivalent of $50 billion (£32.6 billion) each month, the BoJ has changed what it is buying to include longer-dated government bonds, which will bring down long-term interest rates, and riskier assets such as exchange traded funds and real estate investment trusts (REITs). The Bank has also ended its "banknote rule", which prevented the BoJ from buying more bonds than there were bank notes in circulation.
"Not only are you getting positive rhetoric from the Prime Minister, you are also getting action from the bank of Japan. This shows the BoJ is serious about getting 2% inflation," says Lowcock.
Japan as a sector has been producing enviable returns for the past few months. It dominates the top-performing funds for March, with eight out of the top 10 being Japan focused. Ranked first for the month is the Legg Mason Japan Equity fund, with a return of 17.21%, with Invesco Perpetual Japanese Smaller Companies second with a return of 13.32%.
The Japanese Smaller Companies sector as a whole produced an average return of 10.98% for the month, far outstripping the Japan sector, which was the second-best performer with an average return of 6.59%. In comparison, the North American Smaller Companies sector, ranked third, returned an average 4.63%.
With these ongoing returns and an apparent change in strategy from the Japanese government, Nathan Gibbs, manager of the Schroder Japan Alpha Plus fund, is not entirely surprised by the outcome of this latest meeting. "Given the strong language used in recent weeks by both the governor and the Prime Minister, investors already had high expectations for an aggressive easing of monetary policy." he says.
Gibbs says Kuroda has "pulled off a satisfactory result" and adds that investors will now be looking at government policy and structural reform to see whether the an improvement in the economy "can be translated in a long-term revival in Japan's underlying growth prospects".
Indeed, most industry commentators seem to agree that although this is an important first step, the outcome is uncertain. Mark Williams, chief Asia economist at Capital Economics, says the BoJ has announced bolder steps that he had anticipated but "the Bank won't help itself in the long run if it makes promises it can't keep."
He adds: "The new-look BoJ has set itself a high bar to clear to establish its credibility."
More opinion from the experts
Alex Treves, head of Japan equities at Fidelity: "Beyond the positive implications for certain asset prices, a general shift to inflationary expectations in Japan could have a wide-reaching effect. However, the possibility of a return to domestic inflation, and the boost to competitiveness and returns for many companies due to the weaker yen should not distract investors from some key longer-term questions."
Jeremy Batstone-Carr, chief economist at Charles Stanley: "The country has suffered more than two lost decades of economic output and those believing the strength of the Nikkei 225 over the first quarter of 2013 is somehow a sign of economic strength are seriously deluded. Japan must either inflate or die, and achieving the former will be far from easy."
Mark Williams, chief Asia economist at Capital Economics: "Markets are giving it the benefit of the doubt for now. But if the broad monetary aggregates and inflation don't show signs of a shift, the new-found trust in the capacities of the BoJ will rapidly fade."
Jun Tano, portfolio manager of the Fidelity Japan Smaller Companies fund: "The key check point is whether real demand will follow the monetary growth trend. I am carefully evaluating the potential headroom for each company's earning growth and how much of its is reflected in the current valuations."
Chris Towner, director of FX advisory services at HiFX: "The recent actions and resultant yen weakness will allow Japanese goods to become more attractive in price again in the global markets and rebalance the economy back to an export-led economy much to the annoyance of their competitors. And we can expect further play of hard ball by the Japanese."
Rated funds in Japan
Broad-based Japan funds that have best captured performance in the past six months with gains ranging between 40% and 50% include Legg Mason Japan Equity, Martin Currie Japan Alpha, Jupiter Japan Income I Hedge and Invesco Perpetual Japan.
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