Japan Q4 2015 Overview

During the quarter, market participants that expected the BoJ to provide further monetary stimulus were disappointed as it maintained its current asset purchase programme (although it added some minor supplementary measures in December). In justifying the relative lack of action, Governor Haruhiko Kuroda pointed to improved underlying inflationary trends in the domestic economy, notwithstanding the drag caused by lower energy and commodity prices (Figure 1).

Figure 1: Japanese consumer price index measures of inflation have moved into positive territory since the implementation of ‘Abenomics’, supported by the dramatic devaluation of the yen.

(Source: Thomson Reuters Datastream)

The widely followed ‘Tankan’ survey, which measures Japanese business conditions, remains upbeat (Figure 2), supporting the BoJ’s more optimistic view.

Figure 2: Japan’s Tankan business conditions survey is showing encouraging strength, with the yen’s weakness having a positive effect on the export sector and governance reforms also boosting activity.

(Source: Thomson Reuters Datastream)

Although the BoJ has so far refrained from implementing any significant further stimulus, the Japanese government has announced plans to provide fiscal support to the economy. This should further enhance corporate earnings, which have been a key driver of recent strong Japanese equity performance (Figure 3).

Figure 3: Japanese equities have been among the strongest performers in 2015, while the yen is only slightly weaker than it was at the start of the year, having devalued significantly in 2014.

(Source: Thomson Reuters Datastream)

Another key driver of the Japanese equity market has been large Japanese pension funds’ re-allocation of capital from bonds to equities (as the BoJ buys bonds from them as part of its quantitative easing programme). As long as the programme continues, this technical support for the market should remain.

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