The BoJ has re-asserted its credibility: last month’s offer of unlimited bond purchases helped push 10-year JGB yields lower. It went one step further on February 28th, publishing a detailed plan for Rinban operations in March. This is a positive step: clarity is vital for yield curve control to work.
At face value, a hawkish Fed – combined with a successful yield curve control policy in Japan – suggests that the yen could weaken in the short-run. This may in turn provide a further boost to corporate profits, which were strong again in Q4. Equities still trade at a discount to net book value.
However, there are countervailing forces that will limit the yen’s decline over time. Japan’s current account surplus rose to Y20.650tr in 2016. The US trade deficit is widening again. The Trump administration is targetting countries that run large bi-lateral surpluses with the US: this includes Japan. Nonetheless, the case for Japanese equities is not predicated on a weaker yen. Labour shortages are forcing companies to automate. Demographic ‘headwinds’ may ultimately work to Japan’s advantage by underpinning innovation and investment. This morning’s upward revision to non-residential capex for Q4 – and the jump in the Economy Watchers forecast index – underline the case for a strong rise in the Nikkei 225 this year.
Summary
- Demographic headwinds will accelerate automation
- Production of industrial robots has surged. Capex also strong in Q4
- Corporate profits at record highs. Equities still look cheap
