Though Japan’s latest stimulus could help ameliorate the negative impact of the stronger yen, Credit Suisse analysts see little change of an end to deflation in the near term. Hiromichi Shirakawa and colleagues point out in their August 12 research note titled “Good yield hunting” that both Japanese and U.K. authorities’ recent stimulus packages weren’t potent or broad enough to shift expectations for growth and inflation.
QQE regime unable to eradicate deflationary pressure in Japan
Examining the latest Japanese stimulus package, Shirakawa and team point out that it marks the 31st economic stimulus package since the early 1990s when the economy started to take a hit the burst of the domestic asset bubble. The CS analysts aren’t excited about the latest package as they believe it is over multiple years and even decades for some infrastructure investment projects. The analysts argue that the Bank of Japan still looks reluctant to make a clearer and stronger commitment to a substantially extended period of public debt monetization.
Reviewing the potential impacts of the forthcoming stimulus package on economic growth and the debt markets, the CS analysts point out that its headline figure for total spending is JPY28.1 trillion.
The analysts argue that while the package may indeed end up generating a substantial cumulative boost for GDP in the longer run, they anticipate little prospect of sharply faster growth in any single fiscal year:
The CS analysts argue that even though the QQE regime has been in place for over 40 months, it has seemingly proven ineffective in eradicating deflationary pressure and revitalizing economic growth.
Shirakawa and colleagues anticipate that the BoJ will continue its current pace of JGB purchases well into next year. However, the analysts believe the central bank will conduct a “comprehensive assessment” of the QQE+NIRP framework at its meeting next month. The analysts point out that given growth concerns about the effectiveness of the current program, and the negative market reaction to the recent BoJ innovations, a misstep at this meeting could see the yen strengthen further and drive substantial bond market volatility.
Japanese equity market valuations look cheap
Takato points out that over the past few weeks, there have been several signs of stabilization in the Japanese equity market. The analyst notes that the Nikkei’s volatility has also dropped significantly and is close to YTD lows after a tumultuous year driven by events such as the BoJ’s negative interest rate policy and the Brexit referendum. Credit Suisse’s chief global equity strategist, Andrew Garthwaite, believes investors appear to have become overly pessimistic on the equity market, with actual equity risk premiums at 5.8% compared with the warranted equity risk premium at 5%.
Credit Suisse’s rates strategy team believes that despite record low risk-adjusted carry on being long developed market sovereign debt, they are unlikely to witness a sharp global bear market in bonds anytime soon. The FX strategists at CS reiterate their bearish stance on USD/JPY and trimmed their 3m forecast for USD/JPY to 95 from 100.