Tony Norris joined Brian Jacobsen, Ph.D., CFA, CFP®, via video to lend his understanding of Japan’s recent economic stimulus plan in this excerpt of On the Trading DeskSM from Friday, January 25, 2013. Tony, senior portfolio manager with First International Advisors, a subadvisor to Wells Fargo Advantage Funds®, invests in international bonds and currency.
Tony, is Japan a sleeping giant ready to awake or is it in its twilight years?
A very difficult question—I think it’s been going through a major transition. It used to be the major growth economy in the world. It had governments and institutions that were very rigid, inflexible, to deal with problems. Therefore, the transition from a major growth economy to just a simple major economy has been very long, very stretched out. Is it nearing the end of an inflection point where eventually we’re coming through that? Potentially. Is it a sleeping giant? I can’t ignore the fact it still has the second largest pool of reserved assets in the world, and probably a huge pool of overseas assets that it owns, and overseas production capability. So, a sleeping giant, maybe, I doubt it’s in its twilight years.
When you joined us in December, you had mentioned that you thought that Shinzo Abe, the Prime Minister of Japan, would propose some fiscal stimulus and perhaps a shakeup at the Bank of Japan to stimulate the economy. Do you think his plan is going to work?
Well, that’s the thousand dollar question. I think it has more chance than most of the programs that we’ve seen out of Japan over recent years. Whether it will eventually provide sustainable growth that they’ve been looking for and at that inflation level, I think the jury must be out. But I think the first target, which is a weaker yen, he has achieved, and I think it is something that is achievable going forwards. Whether we get, on the back of that, sustainable growth, we wait and see.
Tony, looking at the fixed-income markets, how might interest rates behave in Japan?
As far as the bond market is concerned, the unlimited quantitative easing [QE] itself likely will keep yields low. Unlimited QE means purchasing of assets, which keeps yields low. If it’s successful, and eventually creates inflation, then bond yields have only one way to go, which is up. But that will be a later date. It will be a much slower pace and at a lag to lead to the movements in the yen.
What you said about quantitative easing. When the Bank of Japan [BOJ] made the announcement that they were going to do this unlimited QE, the yen strengthened. I would have thought that it should have weakened on the announcement. Why do you think that happened?
We saw a huge yen weakness ahead of the announcement. The BOJ then made announcements and fell in line with Mr. Abe’s wishes. But the sting in the tail was that the QE program won’t start until next year, and will have a cap. So this uncapped, unlimited QE suddenly would appear to maybe have a cap. That would obviously give the market pause for thought, hesitation, because of the problems with Japanese reforms up to now having been the rigidity, the inflexibility. I believe it is, in part, Mr. Shirakawa trying to set the outline of the plans for next year when he will no longer be the governor. And I think he’s trying to put limits and keep his control there through his retirement. Whether that actually will come through at the end of the day, in that respect, again, I think that the jury is out. We wait and see. But in the short term it would obviously cap the decline because it set a constraint.
That’s all the time we have today, Tony. Thank you for joining us On the Trading Desk.