Japan had been fighting deflation for years since the great crash of its banks and property market thirty years ago. An ageing population saves a lot. Population numbers are falling so GDP will not grow as quickly as in places like the US and UK where migration adds to the numbers. Companies are worried about raising prices and inflation stays around zero. Japan has had a new normal for many years based around a zero interest rate, large scale government borrowing and substantial money creation by the central bank.
On 30 April, Emperor Akihito will abdicate so that his son can take up the duties of Head of State. There is a wish for a new era. Japan will celebrate with an extended Golden Week of public holiday. Those following the Japanese economy hope there will be a boost to consumption and travel, as people splash the cash to party with their families or to enjoy their leisure time. This autumn the country acts as host to the Rugby world cup, where forecasters are sharpening their pencils with a possible $3bn boost to spending from the visitors and the entertainments that go alongside a major world sporting competition. Next summer Japan takes on hosting the even bigger festivities of the summer Olympics. That is already providing a boost to the economy as substantial sums are spent on revitalising the 1964 Tokyo Olympic venues and putting in new facilities required for an expanded twenty first century games. Indeed, the capital spend will end before the games and the decline in construction will need offsetting.
Meanwhile the news from the Bank of Japan and the official forecasters of the Japanese economic outlook remains more downbeat. This week’s cluster of announcements from the central bank included the warning that “the risks to both economic activity and prices are skewed to the downside”. The members of the Policy Board themselves do not expect Japan to hit its 2% inflation target any time soon, even allowing for the possible consumption tax hike this autumn from 8% to 10% for most items. They forecast growth this fiscal year of around 0.8% and price rises of just 1.1% including the tax rise.
The Bank of Japan has accordingly reaffirmed its policy of “powerful monetary easing”. It describes it as “quantitative and qualitative money easing with yield curve control”. This means it sets short rates at minus 0.1% and seeks to keep the ten-year government bond rate at zero. It estimates it will buy another substantial quantity of government bonds this year to add to its vast stock and to replace bonds that mature. Some worry that the Japanese state has borrowed 250% of its GDP so far and is still borrowing more. When you can borrow at zero interest there is no great problem with having a high level of such debt. This is reinforced by the ability of the authorities to create yen to buy up the bonds, so in practice much of the so called debt is now owed to the state by itself.
Japan’s external accounts are in much better health. The country owns $1 trillion of US Treasuries and has the highest net overseas asset holdings of any country. It has in the past regularly achieved a balance of payments surplus. Countries usually only get into debt problems if they owe substantial amounts to foreigners where simply printing their own currency does not guarantee being able to repay easily if the exchange rate drops away.
Japan’s stock market is still 40% below the peak levels hit just before the great crash at the end of the 1980s. Valuations then were at crazy levels with company securities selling at 80 times earnings or more. Today valuations are a little below the world averages, reflecting the absence of great technology winners that we find in the US and China. In the 1980s Japanese consumer electronics and cars swept all before them. Today Sony, Sharp and Panasonic have been outpaced by Apple and Samsung.
The Bank of Japan started buying up Japanese Exchange Traded funds to support the equity market in 2010. It is still pursuing an expanded programme. The most recent announcement is to sustain buying at an annual rate of 6 trillion yen of share ETFs, and 90bn yen of Real Estate Investment Trusts. As a result of this sustained buying more than half the Japanese ETFs are now owned by the Bank. Government pension schemes have also increased their holdings in Japanese shares. This week the Bank has announced it will lend ETF stock to the market if needed to ease liquidity. As this would facilitate shorting Japanese ETFs some commentators are not sure this is a good idea.
So, will the markets respond positively to the forthcoming parties? The danger is they will not be enough to lift the economy out of slow growth and little inflation. How the economy responds to the possible tax hike in the autumn is a bigger issue than the Rugby world cup. The last time the government raised this tax it led to a weak period immediately afterwards. This time they are trying to abate the effects, with a smaller rise and some exemptions. Japan’s policy makers seem gripped by caution and to be short of new ideas to excite investors.
The above article was previously published by Charles Stanley on 25th April 2019