Japanese markets continue to soar ahead of BoJ meeting

18 Jan 2013 | 14:16
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Japanese markets have jumped almost 5% in the first three weeks of the year - almost unheard of for the region - in anticipation of a reversal of the decade and half long slump into deflation.

The Nikkei 225 has soared 4.98% higher to 10,913 points, while the Topix has had its longest weekly winning streak since 1986, rising 1.4%. Meanwhile, the yen fell below 90 to the dollar for the first time in two and a half years.

The Bank of Japan is believed to be announcing a 2% inflation target at the meeting on 21 January following the election of second time Prime Minister Shinzo Abe in December.

He has voiced his desire to push the Bank of Japan into a more aggressive stance in a bid to boost the flagging economy, currently in recession, and remove deflation which has dogged the country for 15 years.

Earlier this month, the Japanese government approved a fresh stimulus package of 10.3 trillion yen ($116bn; £72bn), which Abe hopes will add 2% to Japan's real economic growth.

The package will include infrastructure spending, incentives for businesses to boost investment, as well as measures to rebuild areas devastated by the earthquake and tsunami of 2011. Economists polled by Bloomberg also said they expect further asset purchases to be announced at the two-day policy meeting next week.

Markets responded well to the news and have continued to move higher - rising almost 3% yesterday. Out of the past five years, only on two occasions has the Nikkei posted a positive return in January. In 2010, it gained a modest 0.07%, according to Morningstar, while last year it was up 3.45%, still a way off the 4.98% it has returned so far this month.

Managers who moved to back the region at the back end of last year, in the belief the election of Liberal Democratic Party leader Abe will be the catalyst for Japan to outperform, will be pleased to see such an encouraging start to 2013.

In November, Investment Week reported several managers had moved to back the nation while Jim O'Neill, chairman of Goldman Sachs Asset Management, predicted Japan's "moment is here".

"The higher inflation target is the sort of thing many were advising Japan in the mid to late 1990s when so many people mistakenly lost a lot of money betting against the yen," he said.

"Go get all those guys out of retirement as the time has probably come. The outlook for the yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there."

Guy Foster, senior fund analyst at Brewin Dolphin, said "On the whole we are more positive. We have nothing in Japan at the moment but we are looking at adding to this," while Robert Burdett, co-multi-manager head at Thames River Capital , said he is revisiting his neutral position.

"Our next direction is more likely to add rather than to take away from our holdings. If the LDP get back in and achieve aggressive monetary policy, we would be bullish."

Categories: Japan / Far EastEconomics / Markets

Topics: JapanBank of japanDemocratic party of japanInflation

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