Japan rides the virtuous cycle

No news, it appears, is good news for Japan. The country's stock market and the yen have been heading in the right direction ever since the nuclear threat tit-for-tat between the US and North Korea was taken off the headlines.

The Nikkei-225 index has rebounded by 8.5% from the four-month low plumbed in mid-April and is up 4.1% this year to date. Similarly, the Japanese yen reversed course, resuming its weakening trend versus the US dollar - down 4.2% from the five-month high reached in mid-April - but remains 2.3% stronger against the greenback to date.

The historically strong inverse correlation between the Japanese share market and the currency suggests that given the yen's stronger performance so far this year, the Nikkei-225 index should be weaker (because the benchmark is tilted heavily towards exporters).

The stronger momentum in Japanese equities is, perhaps, explained by the Bank of Japan's (BOJ) growing optimism over the country's economic outlook.

In its 'Summary of Opinions at the Monetary Policy Meeting on April 26 and 27, 2017', released on the 10th of May, the BOJ no longer spoke of an economic "recovery", instead it talked about an economic "expansion" - the most optimistic the BOJ had been in nine years - and of above-potential growth or a positive output gap.

To wit, "Japan's economy has been turning toward a moderate expansion. Although an improvement in domestic demand is not remarkable, the economy is likely to continue growing at a pace above its potential in fiscal 2017 and fiscal 2018, with its underlying trend strengthening."

"Japan's economy is likely to maintain growth at a pace above its potential, mainly through fiscal 2018."

"A positive output gap has been taking hold in Japan with the virtuous cycle led by exports and production becoming firmer."

Markit Economics' latest Japan composite PMI survey gives credence to the BOJ's statement.  While the composite PMI slipped to 52.6 in April (from 52.9 in March), it remains at a 20-month high as the manufacturing expansion gained more momentum (up to 52.7 in April - a 37 month high) and the service sector remaining at its highest level in 42 months despite recording a slight decline to 52.2 in April from 52.9 in the previous month.

The Japanese equity market's positive underpinning does not stop here, it'll continue to be supported by accommodative policy until inflation reaches target.

"...the Bank should continue with the current monetary policy in order to support the virtuous cycle in the economy with the aim of achieving the price stability target of 2 percent."

Despite recent improvements in inflation in the year to March, at 0.2% (headline) and 0.2% (core), they remained way below the BOJ's 2.0% target and as BOJ governor Kuroda himself admits, achieving this is a long way off.

Read more: USBOJPMIBank of JapanKurodaMarkit EconomicsNorth Korea
Editor's Choice
About three-quarters of Australian institutional investors are incorporating environmental, social and governance factors in investment decisions.
Businesses looking to integrate enhanced technological capability must consider its future impacts, or else risk creating a greater trust deficit in the financial services industry.
A comprehensive review of Praemium chief executive Michael Ohanessian's termination and subsequent reinstatement determined the previous board acted inappropriately and unreasonably.
Advisers will soon have access to Challenger's deferred lifetime annuities through Colonial First State platforms.
Brought to you by
3 MAY 2017
Diversifying risk by investing across a wide range of income sources is often a successful formula across volatile market conditions. The Aviva Investors Multi-Strategy (AIMS) Target Income Fund focuses ...
Get it Daily
Keep up to date, don't be the last to know! Get the Financial Standard Daily Newsletter.
Pocket investment guides featuring adviser case studies and a glossary.
Investing trends and strategies from the industry’s thought leaders.
Putting the spotlight on investment products that matter.
Expert Feed
Michelle Baltazar
A case for digital activism
The time is ripe for financial advisers to embrace their role as digital activists - fiduciaries who are early adopters of finance ...
Emma Rapaport
Smashed on university fees, smashed on retirement
Since Scott Morrison's pre-budget announcement that debt would be reclassified as 'good' or 'bad', the government spending spree has ...
Christopher Page
The next generation
On March 20, David Rockefeller - former Chase Manhattan chair and last of Standard Oil founder John D. Rockefeller's grandchildren ...
Michelle Baltazar
Hitting the mark
Ten years from now, every financial adviser in the country will be offering their client a managed account solution. It may happen ...
Featured Profile
Professional Subscription for $295
(inc GST) for 1 year.
FS Advice
The Australian Journal of Financial Planning.
Get the free iPad app
Download the Financial Standard iPad app for FREE.
Link to something EZae11SG