Why September is an important month for Japan (if not the world)
Chaucer’s Canterbury Tales describe April as the “sweetest month,” which TS Eliot then turned on its head in The Waste Land, calling it the “cruellest month” but it is September which is really going to set the agenda for those advisers and clients who have exposure to Japan.
This is the case for two reasons.
- First, the Bank of Japan is scheduled to provide its latest monetary policy decision on Wednesday 19 September. Although Governor Haruhiko Kuroda is publicly still pressing ahead with Qualitative and Quantitative Easing (QQE), the BoJ is undershooting its bond-buying targets and finding it an increasing struggle to bend the market for Japanese Government Bonds (JGBs) to its will.
- Second, Prime Minister Shinzō Abe must fight a triennial contest for the leadership of the ruling Liberal Democratic Party (LDP) on or before Thursday 20 September. If he loses that, his position as PM could become untenable and the so-called ‘Three Arrows,’ or ‘Abenomics’ programme might come under threat, to the potential consternation of those who have warmed to Japanese equities because of his targeted reforms.
Nothing can be taken for granted in Japanese politics (or so it seems anywhere else these days) but Prime Minister Abe is expected to prevail in the LDP leadership, barring some self-inflicted wound, perhaps relating to certain corruption scandals which refuse to entirely go away.
In some ways, Mr Abe is lucky to be running at all, thanks to the abolition in 2017 of a rule that limited leaders to two, three-year terms.
The opposition on paper does not look strong, not least because leading malcontents defected to the short-lived Tomin First party of Yuriko Koike, only for it to implode immediately after her crushing defeat in the 2017 General Election.
At the time of writing his only confirmed opponent is former Defence Minister Shigeru Ishiba. Abe saw him off to win the LDP leadership in 2012 so he does not look overly threatening, especially as former Foreign Minister Fumio Kishida’s decision to support the PM looks to snuff out any room for dissent within the party ranks.
As such, it seems that Abe’s political colleagues like what they see, every bit as much as anyone with portfolio exposure to the Tokyo markets.
The Nikkei 225 index is up by 130% since Abe’s landslide win in 2012 in local currency terms (it is up by 114% in sterling, compared to a 23% gain in the FTSE All-Share over the same period) thanks at least in part to the Three Arrows programme, which comprises:
- Fiscal stimulus
- Economic and social reform, including a shake-up of corporate governance and how companies interact with investors, an area of great improvement but one where there is still scope for further advances in return on equity and dividends in particular
- Huge monetary stimulus – and this is where the Bank of Japan comes in.
Headline Japanese index is up by 130% since the launch of Abenomics in 2012
Source: Thomson Reuters Datastream.
To support Abenomics, help Japan cope with its 250% debt-to-GDP ratio and try to boost both growth and inflation, the BoJ has run ultra-loose monetary policy for two decades and more. But it has been taken to a new level by Governor Haruhiko Kuroda.
Since October 2014, the BoJ has been buying ¥80 trillion a year in Government bonds, real estate investment trusts (J-REITs) and equity Exchange-Traded Funds (ETFs) – that is the equivalent of £550 billion a year, more than the Bank of England has done in QE in total since it started with its scheme in 2009.
Yet inflation is still not at the BoJ’s 2% target and the yield on the headline JGB is starting to break out above the central bank’s intended 0.1% cap, in a direct threat to its monetary authority.
Japanese benchmark bond yields are creeping higher
Source: Thomson Reuters Datastream
The 10-year JGB may be feeling the strain as Japanese GDP starts growing again, after a stumble in the first quarter, but also because there are suggestions that the BoJ is starting to stealthily taper – or cut back on – its QQE scheme, either because it wants to, or because it has to do so.
BoJ assets already represent more than 90% of GDP, compared to 24% of GDP for the Bank of England in the UK and 20% for the Federal Reserve in the USA.
Bank of Japan balance sheet continues to expand thanks to its QQE scheme
Source: Bank of Japan; FRED – St. Louis Federal Reserve database; Thomson Reuters Datastream
Although tapering and now withdrawal of QE by the US Federal Reserve has not knocked the US stock market off its path, one reason may have been the BoJ (and European Central Bank) stepped up and poured on policy stimulus just as the Americans stopped.
But even a modest withdrawal of QE and liquidity by the US has caused chaos in emerging markets, where currencies such as the Argentine peso, Indian rupee and Russian rouble have all cratered.
If Japan starts to taper QE then another source of cheap cash will start to dry up, especially as the ECB plans to stop adding to its QE plan in December. That could have wider implications than we realise, looking at this final chart, which shows how growth in the assets of the world’s five leading QE proponents may have helped to goose global share prices.
Growth in global central bank assets looks poised to slow very rapidly (even before Japan contemplates tapering QQE)
Source: Bank of England; Bank of Japan; FRED – St. Louis Federal Reserve database; Swiss National Bank; Thomson Reuters Datastream; US Federal ReserveSo while the BoJ is not expected to make any dramatic changes this month, advisers and clients may need to check any subtle changes in Governor Kuroda’s scripts, whether they have direct exposure to Japan or not.