It is clear that Japanese equity markets have benefited from the Bank of Japan’s quantitative easing progamme, as have many investors in the region in recent months, especially those invested in the Lindsell Train Japanese Equity and Legg Mason IF Japan Equity funds, which delivered the second and fifth-best returns in the first six months of year.
However, while Japanese QE has boosted asset prices in the region, there are concerns about spillover effects into other regions.
“There is a question about what Japanese QE does in terms of real economy,” said Paul Niven, F&C’s head of multi-asset. “It has an impact on asset prices and currencies, and that is pressuring competitors to Japan, including China.”
Despite Japan’s QE policy being nearly eight months old, Peter Westaway, Vanguard’s chief economist for Europe, sees scope for further injections if the Bank of Japan is to hit its inflation target of 2%.
“The fundamental problem in Japan is that they have not quite committed to the amount of easing they will need to get to the expected level of inflation,” he said. “Central bankers around the world have learned that QE is only really effective if you go all in, and there will probably be further Japanese QE going forward.
“However, the Bank of Japan has become more relaxed recently over how quickly they get to the 2% target, and the danger of them easing off on the speed is that it might be sending the signal that they do not mind if they get stuck at 1%.”
Regardless, the yen is likely to remain weak for some time, and Niven warned that this could pressure China into lowering its renminbi peg in order to remain competitive on an import/export basis, which in turn could cause a deflationary flood across Asia and, subsequently, global markets.
