Japanese investors likely follow global trends, not lead - Capital | Outlook data
Capital Daily (28th June 13) - UK recession deeper than previously thought
(Insider Stories) - Hopes that additional asset purchases by the Bank of Japan can offset some of the global impact of the scaling back of purchases by the US Fed may be overdone, but they are not entirely misplaced, London-based research provide Capital Economics says. The following is an excerpt from a Capital Daily report.
- Japanese investors perhaps more likely to follow global trends than lead them …
- … but the Bank of Japan will help keep global monetary conditions very loose
- Japan’s May CPI could show core prices no longer falling (00.30 BST)
Key Market Themes
Hopes that additional asset purchases by the Bank of Japan can offset some of the global impact of the scaling back of purchases by the US Fed may be overdone, but they are not entirely misplaced. (See our Global Markets Update, “How far can the Bank of Japan’s QE replace the Fed’s?”, published on Thursday.)
To recap, the Fed is currently buying Treasuries and mortgage-based securities worth a total of $85bn per month. Even before the statements from Chairman Bernanke on 19th June, we had expected the Fed to start to taper these purchases later this year, most likely from September, and then halt them completely in mid-2014.
In contrast, the Bank of Japan intends to buy sufficient assets to double (roughly) Japan’s monetary base from ¥138 trillion at the end of 2012 to ¥270 trillion at the end of 2014. This translates into monthly increases of up to ¥6 trillion in the monetary base, with gross purchases of JGBs running at around ¥7 trillion.
The net asset purchases (comparable to the Fed’s activity) will be rather less, perhaps ¥5.5 trillion per month, which at current exchange rates is around $56bn. The upshot is that, on unchanged exchange rates, the dollar value of the Bank of Japan’s monthly asset purchases could exceed those of the Fed in the first quarter of next year.
The question then is whether the additional purchases by the Bank of Japan can offset the broader impact of the tapering of purchases undertaken by the Fed. In principle, a dollar’s worth of additional liquidity in the hands of a financial institution in Japan has just as much potential to support global markets as a dollar in the hands of one in the US. But there are a number of caveats.
For a start, the asset purchases planned by the Bank of Japan were announced back in April. Although the additional liquidity has not yet been provided, at least some of the potential support should already be reflected in asset prices. There might only be a further substantial boost if the Bank of Japan steps up the pace of purchases over and above its current plans. We do think there is a good chance of this happening if inflation continues to fall well short of the 2% target, but it is not on the cards just yet.
Some of the potential support could also be offset by currency movements. For example, we are forecasting the yen to fall from 98 today to 110 against the dollar by the end of 2014. This would reduce the dollar value of the Bank of Japan’s monthly asset purchases from around $56bn to $50bn.
Finally, Japanese institutions may have a lower propensity to recycle funds into riskier (overseas) assets than their US counterparts. Indeed, the Bank of Japan’s “bold easing” to date has failed to unleash the wall of Japanese money into overseas markets that some had hoped for. There was a brief flurry of excitement when Japanese financial institutions turned net buyers of foreign bonds again in early May, but they have returned to being heavy sellers ever since. We suspect that Japanese investors will continue to follow global trends, rather than lead them.
Nonetheless, the Bank of Japan’s plans are another example of how global monetary conditions are set to remain very loose, even if the Fed scales back its own purchases. (Indeed, they will remain loose in the US too.) What’s more, even if Japanese investors themselves don’t buy more overseas assets, near-zero yen interest rates for the foreseeable future could allow others to do so, via the carry trade. (Julian Jessop)
What to watch for today: North America
We estimate that Canadian monthly GDP (13.30 BST) contracted by 0.1% m/m in April, dragged down by lower industrial production. Manufacturing output likely dipped by 1.0% m/m. Thankfully, construction activity nudged higher, helping to buffer declines elsewhere. But any rise was probably fairly modest. In the services-producing sector, whole and retail trade figures suggest that services output may have tempered the material decline in the goods-producing sector. (David Madani)
Meanwhile, the latest US personal income and spending figures were broadly neutral for QE3 tapering. (Data released on Thursday.) The 0.5% m/m increase in nominal personal income and 0.4% m/m gain in real disposable income were stronger than in recent months. And the 0.3% m/m rise in nominal spending (0.2% m/m in real terms) was in line with expectations. But downward revisions to real spending in April, February and January mean that real consumption growth in the second quarter will be weaker than previously looked likely. What’s more, the release also revealed that a 0.1% m/m rise in the core PCE deflator in May left core PCE inflation at a record low of 1.1%. If it stays there or falls further, more Fed officials will join St Louis Fed President James Bullard in objecting to the Fed’s QE3 tapering timetable. (Paul Dales)
Continental Europe
No major data or events scheduled for today.
The stronger than anticipated rise in euro-zone Economic Sentiment Indicator (ESI), from 89.4 to 91.3 in June, left the headline index at its highest level since May 2012. (Data released on Thursday.) For now, the index is consistent with annual falls in euro-zone GDP of just under 1%. This suggests that, in quarterly terms, GDP may have begun to stabilise after six consecutive contractions. But the index has staged mini recoveries over the past couple of years that have subsequently been reversed. In addition, the composite PMI paints a slightly more downbeat picture of near-term growth prospects. Overall, the euro-zone economy remains fragile and there is no guarantee that the recent pick-up in sentiment will prompt the region as a whole to exit recession any time soon. (Ben May)
UK
The June GfK consumer confidence balance (00.01 BST) will be closely watched to see if May’s sharp rise in confidence can be sustained. We think that confidence is likely to slip back this month because employment growth remains weak and real wages are still falling. (Michael Pearce)
Meanwhile, April’s index of services figures (09.30 BST) will give us more of a clue as to how the start of Q2 fared according to the official data. The recent improvement in the CIPS service survey bodes reasonably well.
Elsewhere, with the 0.3% quarterly rise in GDP in Q1 left unrevised on Thursday, the greater interest was in the revisions to the data before that. The good news was that, as anticipated, the double-dip was revised away. The bad news was that the 2008/09 recession is now estimated to have been deeper than before. Together with other minor revisions, this means that GDP now stands some 4% below its pre-crisis peak, compared to the previous estimate of 2.5%. We remain cautious about the economy’s near-term prospects and still think that Mr Carney should, and will, take action after he arrives next week to ensure the recovery gains traction. (Vicky Redwood)
Japan
The usual end-month data rush comes today, including May figures for retail sales and overall household spending, unemployment, industrial production, housing starts and the CPI, as well as the timelier manufacturing PMI for June.
The headlines could be taken by the May CPI, which is likely to show core prices (excluding fresh food) no longer falling year-on-year, and perhaps even rising (as already signalled by the Tokyo index). This could generate some positive headlines about the “end of deflation”, although we would be wary of declaring victory just yet.
After all, inflation would still be a long way short of the Bank of Japan’s target of “around 2%”. The pick-up in price pressures that has been seen mainly reflects higher utility charges and the rising cost of imports, particularly commodities, reflecting the pass-through of the weakness in the yen. Indeed, “core core” inflation (excluding all food and energy) is still negative and likely to remain so for several months yet. (Julian Jessop)
