Japan births a new economic policy

Asian markets were looking at a negative open on the back of a poor performance in US markets overnight.

Source: Bloomberg

The Nikkei in particular looked primed to see further losses on the back of yesterday’s messy three-day catch up trade. The ASX 200 seemed to be the only market in for a benign performance. However, this situation had switched by afternoon trade with the ASX down and the Nikkei up, albeit not by a large extent either way.

Mainland China and Hong Kong markets continued to edge lower, as negativity about the economic outlook and low volumes continued to be a drag on market performance. Volumes on the Hang Seng Index were down 26.3% below their 30-day moving average, and they were down 23.6% on the Shanghai Composite. Volatility in the Shanghai Composite has been markedly quelled recently. One of the major reasons seems to be the restrictions on margin lending and the massive associated drop in outstanding margin finance, which has declined 58.6% from its peak in June.

Fed Chair Janet Yellen’s speech this morning largely re-emphasised the points she made at the press conference last week. But given some of the very hawkish statements seen from the likes of Lockhart and Dudley since the Fed decision last week, Yellen’s speech served to clarify the Fed policy direction somewhat. Considering the language from the other Fed speakers, I would have been surprised the US treasury market was still only pricing the likelihood of a rate increase at the Fed’s October meeting at 18%.

One of the key points Yellen has been stressing of late is that, despite the strong performance in headline employment numbers, the more nuanced measures of participation and involuntary part-time employment are still very weak. Yellen stated that the long-term unemployment rate was thought to be 4.9% (currently 5.1%), but as the participation metrics are poor, the unemployment may have to be stronger at 4.9% for an extended period of time to pick up the utilisation slack.

Nonetheless, despite ongoing concerns about employment and inflation, Yellen emphasised that rates could not be left unchanged until this situation changes. There is a significant time lag from Fed policy and, if rates are not hiked soon, there is a serious concern that Fed policy could overshoot. Rates would then have to be raised in quick succession to halt a boost of uncontrolled inflation.

This statement understandably prompted a number of currencies to weaken as the prospects for continuing US dollar strength remained. In the immediate wake of Yellen’s speech, the Aussie dollar dropped 0.7% and the Japanese yen weakened 0.3%. Further yen weakness does seem to be held back by continued safe-haven buying.

Nonetheless, there has been much discussion as to how the Bank of Japan (BOJ) can step up its quantitative and qualitative easing (QQE) program. The BOJ is limited in its ability to purchase more government bonds, as it is currently already purchasing around 90% of all government paper issued each month. There is speculation that any increase would then start to focus on buying local government bonds or the BOJ may start cutting the interest rate on deposits that banks keep at the BOJ.

Japanese inflation data were mixed, with Core inflation (ex-fresh food) declining 0.1%, its first negative print since April 2013. But headline CPI and Core Core (ex-fresh food and energy) both increased more than the previous month, showing that inflationary pressures are beginning to rise. Whilst this is a positive, it is unlikely to stay the hand of the BOJ and is more an indication that QQE is starting to work. With an increased program and a steadily improving global outlook, they could still achieve 2% inflation at some point in 2016.

Japanese Prime Minister Shinzo Abe in a bid to distract from his unpopular security legislation has (as expected) announced a new “Three Arrows” policy. These are: seeing Japan’s GDP rise from 500 trillion yen to 600 trillion yen, increasing Japan’s fertility rate from 1.43 to 1.8 births per woman, and increasing social security for carers. Hardly revolutionary, and the birth rate push seems somewhat at odds with increasing female participation in the labour force. Of course, the obvious solution of increased immigration is a non-starter for Shinzo Abe’s conservative government.


The ASX 200 had a strong open despite the negative lead from US markets, rising over 5100 initially. However, this was given back later in the day as the poor performance seen in external markets eventually infected the local bourse. But in the last hour of trade, the ASX manage to edge over yesterday’s close of 5071.

The energy sector was the biggest drag on the index, declining 1.3%, as tepid moves in oil continued to emphasise the negative outlook for the sector. Uncertainty about whether Oil Search (OSH) will be bought out seemed to affect the stock, as it declined 4.1%. Banks were also a major drag on the index, declining 0.3%, with only Macquarie Group (MQG) gaining on the day.

Materials regained some of their losses of recent days as investors stopped selling BHP, the index rose 0.9%.

The consumer discretionary and consumer staples were the best performers, up 1.1% and 1.2%, respectively. With a particularly strong performance seen by Myer (MYR) after its recent poor form, rising 9.3%.

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