Japan Risks Investor Confidence

Market Trends - 27/03/2015

Much has been made of the ambitious economic efforts of the Shinzo Abe Administration in conjunction with the Bank of Japan.  Some have heralded the determination as a breath of fresh air for an economy suffering under the weight of nearly two decades of deflation.  However, on the other hand, the extensive monetary policy measures taken to spur inflation risks the nation’s future as it increases the risk of an economic implosion.  The main aim of weakening the Yen to support exports coupled with the fervent determination to reach the inflation target have seen the Bank of Japan balance sheet expanded to unprecedented levels.  On a relative basis, the Bank of Japan is easing at such a frenetic pace that it is threatening the largest sovereign bond market in the world with greater volatility as liquidity in the debt dries up. 

The Bank of Japan is quickly running out of assets to buy to support its quantitative easing program with expectations that the supply of available REIT and ETF securities will be nonexistent by 2017 if easing continues at the present pace.  The Bank of Japan has the potential to open up monetary easing to individual stocks should the situation necessitate, however this would only raise the stakes as the Bank of Japan tries ever more desperately to grow the economy.  Persistent headwinds, both local and global are giving the Central Bank pause for concern.  If they lose control, it could destroy both the fixed-income and equity markets as the relentless drive to buy more to support the economy falls flat.  The possibility of a substantial correction in Japanese equities could drive the Bank of Japan to reconsider its efforts which have fundamentally changed the way the economy internalizes monetary policy.  Further weakness in the Yen is likely over the short-term especially if the dollar rebound materializes.  However, if the Bank of Japan fails to shock markets with a new expansion of monetary stimulus, this could see all the efforts of recent years go down the drain very quickly.


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