Turning Japanese for Stimulus

The big news at the start of April was Japan's central bank (BOJ) single-handedly influencing jittery global markets after announcing the world's most concentrated monetary stimulus, putting the yen into a nose-dive and fuelling a surge in Japanese stocks to 4 ½ year highs. This new package is all in aid of curbing the declining prices in Japan. The East-Asian powerhouse has set their inflation target at 2%, a figure which is ambitious if nothing else. Governor Haruhiko Kuroda vowed to inject about $1.4 trillion (£919.5 billion) into the economy in less than two years, to end an extended period of stagnation.

The spending package includes 10.3 trillion yen in extra outlays by the central government. President Abe's administration is pledging to spend 19 trillion yen in 2015 in support of reconstruction of the coastal areas devastated by the March 2011 tsunami disaster.

With global markets all responding positively to the bold proposition, the yen conversely sank, registering its biggest daily fall against the dollar since October 2008. Certainly the subsequent decrease in the yen versus all major currencies will have a positive effect on Japanese exports. The fear with a falling yen however, is the risk of upsetting other Asian exporters  such as South Korea, Taiwan and China who may lose their competitiveness as their currencies strengthen against the yen relative to others, and leave Japan open to accusations it is devaluing the currency. Emerging economies will also be concerned about the potential flood of inflows as investors borrow cheaply in yen and then invest elsewhere, as they have done with the Fed's quantitative easing.

The BOJ's policy was viewed as a radical gamble to boost growth and end deflation. It is unmatched in scope even by the U.S. Federal Reserve's own quantitative easing programme. The Federal Reserve may buy more debt, but the Japanese central bank's stimulus is a much larger proportion of the economy.

"Investors were justified in feeling shocked and awed," said Stephen Jen, managing partner at SLJ Macro Partners. Through Reuters, he estimated Japan's anticipated programme was twice as large as the Fed's asset purchases when adjusted for GDP.

However, the monetary reserves held by the Bank of Japan had already hit a record in March, and previous attempts by the government to boost prices in Japan have so far not succeeded. This raises the question whether throwing more money at the problem will constitute real change?

The BOJ's dramatic stimulus plan came along with supportive comments from European and Federal Reserve officials, suggesting central bank policies will keep underpinning the world's economy to

the benefit of equities. So far in 2013, stocks have been the top performing financial sector by some distance.

The US Fed’s stimulus efforts along with signs of improvement in the U.S. economy have helped stocks rally since the start of the year stateside. While the S&P 500 broke above its closing record last week, it has yet to surpass its intraday record high, and investors have mostly pulled back from the market this week.

"The Fed officials certainly have been going out of their way to point out that they're staying the course and sticking with their programme, which has probably been reassuring for markets," said Peter Jankovskis, co-chief investment officer at OakBrook Investments.

An unexpected jump in U.S. weekly jobless claims to a four-month high, raised questions about the labour market's recovery a day ahead of the U.S. government's widely watched monthly jobs report. A report released at the beginning of April showed U.S. companies hired at the slowest pace in five months in March.

Japan’s stimulus package may be greeted with guarded optimism in Europe and the U.S.; it does raise questions whether another Japanese “super-asset bubble” will be created and be larger than those felt in the 1990s. Only time will be able to test the strength of a Japanese recovery,  "…it may not work but they will go down swinging," added Bill Gross, founder and chief investment officer at giant bond fund PIMCO.

 

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