31st October 2014
Japan’s central bank has shocked the market by extending its stimulus package, sending its major index soaring overnight.
The Nikkei 225 saw its biggest one-day gain since June 2013 as stocks soared 4.8% to close on a seven year high after the Bank of Japan announced it would increase its economic stimulus. It plans to purchase more shares of exchange-traded funds (ETFs) and real estate investment trusts (Reits), as well as extend the duration of its Japanese government bonds.
BoJ governor Haruhiko Kuroda said the expanded stimulus package was needed to prevent a reversal into a ‘deflationary mindset’ which has stopped growth for a number of years in the country.
The bank will:
Alex Treves, head of Japanese equities at Fidelity Worldwide Investment, said while the extension of the quantitative easing (QE) measures has made the headlines the Nikkei had been boosted doubly.
‘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 BoJ unexpectedly expanded its quantitative and qualitative easing programme.’
The threat of inflation has pushed the BoJ to take action despite the economy growing at a modest rate.
‘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 consumer price index has slowed to 1% and the decline in crude oil prices, while positive for the overall economy, will exert further downward pressure,’ said Treves.
Treves added that the implications for Japanese equities were positive but not without risk.
‘Japan’s relatively low profile notwithstanding, the policy agenda is exciting,’ he said. ‘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.’