A weak yen boosts Japanese equity markets

Asia (including Japan)

Equity markets across Asia generally declined during October, dampened by uncertainties over the outcome of November’s US Presidential election and a drop in the price of oil. In comparison, Japanese equity markets rose relatively strongly during October, boosted by a weakening in the value of the yen. The Nikkei 225 Index rose by 6.1%, while the broader-based Topix Index rose by 5.3% and the TSE Second Section Index – which represents medium-sized Japanese companies – climbed by 5.4%.

The Bank of Japan (BoJ) remained relatively sanguine over the outlook for the country’s economy in its latest quarterly evaluation. Policymakers expect wages to rise, supported by tightening in the labour market; nevertheless, there are persistent concerns surrounding the prospects for personal consumption. Investor confidence was somewhat dampened during October by disappointing data on retail sales and industrial production. Retail sales fell at an annualised rate of 1.9% during September; meanwhile, industrial production stagnated in September compared with August, raising concerns that economic growth might be faltering.

The BoJ appears committed to pursuing its 2% target for inflation through its current ultra-loose monetary strategy. This target, however, appears to be some way off, given that consumer price inflation continued to fall during September, dropping at an annualised rate of 0.5%.

Japanese investors drew some encouragement from the BoJ’s quarterly Tankan survey of business sentiment, which showed that sentiment amongst Japan’s large companies had remained generally steady during the third quarter. Although sentiment amongst large manufacturers remained robust during the period, sentiment within the services sector deteriorated.

Looking ahead, the International Monetary Fund (IMF) expects Japan’s economic growth to remain weak: the country’s economy is forecast to expand by 0.5% this year and 0.6% next year. Meanwhile, credit ratings agency Fitch warned that the BoJ’s recent economic stimulus measures are likely to compound the risks faced by financial institutions, and could actually undermine efforts to boost the economy. Fitch expects the BoJ’s policy rate to be cut from -0.1% to -0.5% by the end of next year.

South Korean technology giant Samsung issued a profits warning following the withdrawal of its Galaxy Note 7 smartphone from the market. Investor sentiment in South Korea was further undermined during October by news of a corruption scandal involving individuals close to President Park Geun-hye, and the benchmark Kospi Index fell by 1.7% over the month.