By Wouter Sturkenboom
The decision to implement negative interest rates today is a meaningful step towards further stimulus by the Bank of Japan (BoJ). It is not as full-throttle as additional quantitative easing (QE), but it is a significant positive nonetheless.
Japanese equities have been poor performers so far in 2016, with a negative lead from Wall Street exacerbated by Yen strength, so this move injects some oxygen into the market.
Today’s move supports our small overweight to Japanese equities. However the economic run-rate and the earnings deceleration are so problematic, that the market needs all the help it can get from the BoJ. With today’s move mitigating downside risks, we are more confident about a bounce.
Our central case for Japan remains that economic growth will continue. Stimulation from the BoJ is a positive, and growth concerns – emerging markets, China, US profits – are second order problems. It was hoped that the Japanese economy would be stronger than current levels at this stage, however it is encouraging that the central bank is happy to act strongly through negative interest rates.
The implications for the US Federal Reserve (Fed) are mixed. The currency dynamic should be an argument for the Fed to stay its hand on a rate rise in March. However, the Fed cannot imaginably like having to juggle the rest of the world’s growth needs, as well as treading a delicate normalisation path in the US itself.
If Japan and Europe show a greater willingness to take care of their own policy needs well, that unties the Fed’s hands and gives them greater leeway to tighten in March, if they see fit.
Wouter Sturkenboom is senior investment strategist at Russell Investments
