Comments on today’s market movement in Japan

Comments on today’s market movement in Japan

In view of today’s sharp advance on the Japanese market, please see below for some comments from Fidelity’s Tokyo investment team.

Alex Treves – Head of Equities

The Japanese market advanced strongly today, with the broad-based TOPIX up by 4.3% (+7.4% for the week).

Japanese stocks rallied in the morning session on speculation that the country’s public pension fund was set to announce an asset reallocation in favour of domestic equities. A second boost arrived in the afternoon when the Bank of Japan (BoJ) unexpectedly expanded its quantitative and qualitative easing (QQE) programme.

The October 31 Nikkei newspaper reported that the $1.2 trillion Government Pension Investment Fund (GPIF) was set to raise its allocations for domestic and overseas equities to 25% apiece (from current targets of 12%) , while reducing domestic debt from 60% to 35% (over the medium-to-long term). Transition to the new allocation targets was reported to potentially imply +¥12 trillion (around $11 billion) in buying of Japanese equities.

At the conclusion of its monetary policy meeting this afternoon, the Bank of Japan (BoJ) unexpectedly announced an expansion of its QQE programme:

-The central bank will accelerate the annual pace of growth in the monetary base to ¥80 trillion (representing an additional ¥10-20 trillion).

-The purchase of JGBs will increase by around ¥30 trillion to ¥80 trillion annually, and the average remaining maturity will be extended to 7-10 years.

-At the same time, the BoJ decided to triple the annual pace of ETF and J-Reit buying, while making ETFs that track the JPX-Nikkei Index 400 (an index that prioritises companies that meet certain profitability and governance criteria) eligible for purchase.

The announcement from the BoJ accelerated the market’s intraday gains and undercut the yen, which fell to a six-year low of ¥111/US$.

While the BoJ maintains its basic assessment that the Japanese economy is following a moderate recovery path, the risk of slowing inflation appears to have tipped its hand.

Since peaking in April, the core CPI has slowed to +1.0% (excluding the impact of the sales tax hike) and the decline in crude oil prices, while positive for the overall economy, will exert further downward pressure.

A further consideration is that the decision on a second sales tax hike (scheduled for October 2015) is approaching and BoJ officials have warned against damaging confidence in the country’s fiscal sustainability. The renewed barrage of QQE suggests that they are intent on proceeding with the tax hike whilst mitigating the risks.

In conclusion, the implications for both Japanese equities and the overall reflation theme are positive, but not without certain risks. Japan’s relatively low profile notwithstanding, the policy agenda is exciting. Considering the fundamental changes in corporate policy that are also occurring and the fact that Japan is among the few major markets to offer a valuation discount, the mid-term outlook for Japanese equities is attractive.

June-Yon Kim – Portfolio Manager

In general, I think that today’s move by the Bank of Japan (BoJ) shows its commitment to meeting its mid-term inflation target of 2%.

Given the relatively slack recovery post the consumption tax hike and the subsequent move down in energy prices, I think the CPI is trending below a threshold that the BOJ is comfortable with and that they wanted to be proactive, just as they were in April.

Also, discussion about a potential postponement in the next consumption tax hike might have weighed in on BOJ thinking.

For further information, please contact:

Emma Lehtovaara

Fidelity Worldwide Investment

Tel. +46 (0)8 505 257 02

emma.lehtovaara@fil.com

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