Respite for Japan but next steps by Shinzo Abe, BoJ critical

Japanese markets were among the worst hit by the Brexit vote, but the Nikkei has since recovered all its losses.

A model displays a traditional Japanese yukata during a Tokyo festival event.

Brexit — what Brexit?

Japanese markets were among the worst hit by the uncertainty following Britain’s vote to leave the European Union late last month. But last week the Nikkei Stock Average rose 9.2 per cent to 16,497.85, back above the level prior to the British referendum.

The yen, too, regained its pre-Brexit vote level, falling 4.1 per cent last week against the US dollar — a tonic for Japanese policymakers who want the country’s currency weaker in the hope that that will help key exporting companies.

Domestic and global factors were behind the change in fortunes, including success for Japan’s ruling government in a parliamentary election, strong economic data from the US and a measure of political certainty returning to Britain, with the selection of a new prime minister all helping.

The question now is whether the Japanese resurgence can be maintained.

“I do believe it’s a turnaround,” said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners. “In fact, things were not doing that bad anyway. It’s just the macro-risk that led the currency to appreciate and hurt sentiment.”

Despite the Japanese market’s good week, the Nikkei is down 13 per cent this year, putting it among the world’s worst-performing stockmarkets in 2016. And at ¥104.94 to the greenback, the yen remains up 15 per cent since January, despite the Japanese central bank’s efforts, such as introducing negative interest rates for the first time in January.

Sentiment was helped last week by the 71 per cent surge in shares of Nintendo, amid a sudden craze for its Pokemon Go game. Messaging-app operator Line also rose 32 per cent on Friday in its Tokyo trading debut.

Much now depends on how investors react to important policy initiatives from the government and central bank expected in coming weeks, with markets expecting a doubling-down on so-called ”Abenomics”. The program, brought in by Prime Minister Shinzo Abe three years ago, aimed to stoke Japan’s economy through massive fiscal and monetary stimulus and structural reforms.

The global economic outlook is also important. Some safe-haven yen buying returned late on Friday after a coup attempt in Turkey.

Mr Abe’s solid win in elections to Japan’s upper house of parliament last Sunday week has ignited hopes the government will soon announce a big spending package. Many also expect the Bank of Japan to ease policy further at its July meeting.

Former Federal Reserve chief Ben Bernanke met last week with BoJ governor Haruhiko Kuroda, which some took as a sign Japan could soon introduce a radical program of money-printing known as “helicopter money”, an option Mr Bernanke has publicly discussed in the past.

Still, there is little consensus among market participants as to what stimulus will actually emerge. Already, officials have poured cold water on the helicopter money idea, at least a version that involves the BoJ directly fin­ancing government debt.

Takuji Aida, chief Japan economist at Societe Generale, said he expected a government fiscal stimulus package of at least ¥10 trillion ($124.9 billion), which could include increased public investment, or tax reliefs to spur consumer spending. He also said he expected the BoJ to cut the rate charged on some bank excess reserves to minus 0.2 per cent.

“If the Bank of Japan doesn’t cut this month, then (US) dollar-yen could go back to 100,” Mr Aida said.

Others are cautioning of risks in banking on scenarios susceptible to politics. The government could draw up an extra budget and the BoJ could ease further, said Koji Toda, chief fund manager at Resona Bank. But it was too soon to be sure the yen would continue to fall, helping all companies reliant on external demand.

“We can invest, selectively,” he said, “but we still can’t invest on the basis of a weak yen scenario.”

One complication for the BoJ is the unpopularity of some its measures, particularly negative interest rates. Top officials in Japan’s fin­ancial industry have openly questioned the policy’s efficacy.

“Financial intermediary functions have been lowered. Retail consumption has been negatively affected,” said Life Insurance Association of Japan chairman Akio Negishi. “I’m concerned that further deepening of the negative rate would result in greater adverse ­effects than benefits.”

Meanwhile, Japan remains susceptible to factors beyond its control. Another bout of political instability or economic fears in ­Europe and the US could boost the yen, which is considered a store of value in times of uncertainty.