Japan likely to roll out an aggressive fiscal stimulus: Instreet
The landslide victory for Japan’s ruling coalition in the Upper House election last weekend has provided further fuel for equity markets that have been in overdrive around the globe for the past two weeks.
Solid gains have been made in Europe, Australia and the US over this period as markets shrugged off Brexit, but the standout performer has been Japan with a 9.2% jump in the Nikkei 225 alone last week – the best five-day showing for more than six years.
Instreet Managing Director George Lucas says it now seems likely that Japan will roll out an aggressive fiscal stimulus, as well as more quantitative easing, to bolster growth and inflation. This is putting pressure on the Yen, with the US Dollar up 4.9% against it last week to ¥105.41.
“We expect the Bank of Japan will soon announce the expansion of asset purchases under its current policy of Quantitative and Qualitative Monetary Easing (QQE), perhaps as soon as the end of this month. However, we doubt the bank will directly finance a game-changing fiscal boost via ‘helicopter money’ as some in the market speculate.
“The ¥10 trillion fiscal stimulus package now being proposed by the Abe Government is certainly large at about 2% of annual GDP, but it would not be unprecedented and should assist the economy.”
Instreet expects attention to shift from Japan to the US this week where it expects markets may get a boost from better economic numbers and earnings announcements
Lucas says the earnings season has had an encouraging start, notably the banks. But improved earnings need to be seen in technology and energy to maintain momentum.
June economic data highlights include:
- Unexpected strength in US retail sales means second-quarter GDP growth appears to be between 2.5% and 3.0% annualised, and real consumption growth should be about 4%.
- US core consumer prices increased by 0.2% month on month, which was enough to push the annual core inflation rate back up to 2.3% (from 2.2%).
- The 0.6% month on month rise in US industrial production was primarily because of a rebound in manufacturing output. This included a 5.9% month on month increase in motor vehicle production.
European markets, however, continue to struggle, and financial stocks have significantly underperformed. Italy is suffering badly, having underperformed the rest of the euro-zone as fears of a banking crisis mount.
Lucas says fears in Italy are justified in light of EU rules that make it politically difficult to recapitalise banks in Italy.
“But we believe Italian policy-makers will find ways to provide support to the banks, and more broadly we are optimistic about Europe, believing their bank stocks may not be a drag on equity markets for much longer.
“In our opinion there is scope for equities in the euro-zone to recover as tighter than anticipated monetary policy in the US will cause the Euro to depreciate against the dollar.”
