Japan Escapes Recession but will Stocks Rise?

Japan avoided a recession as the latest GDP figure reveal. But Royal London economist Ian Kernohan expects the central bank will push ahead with further stimulus

Karen Kwok 18 May, 2016 | 4:22PM
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Japan has risen out of recession; The economy grew faster-than-expected at an annual rate of 1.7% for the first three months of 2016. But the positive data could be a “cue” for additional monetary easing from Bank of Japan in an effort to devalue the Japanese currency, says Ian Kernohan, economist at Royal London Asset Management.

“I think the Bank of Japan have scope to do more monetary easing, but they only do it when nobody thinks they are going to do it,” he told Morningstar at a London briefing this morning.

“They want to get bigger response by surprising the market. The latest GDP figure is quite positive and that it will be a cue for the bank to go ahead easing the monetary policy further to get the yen lower.”

Correlation between US Interest Rates and Japan

A rate hike by the US central bank will also help to move the Japanese currency lower, according to Trevor Greetham, head of multi asset at Royal London.

“Weakness in the US currency absolutely matches by the underperformance of Japan equities, so we think when the US central bank raises interest rates and the US currency will strengthen again, it will also utter result in further weakness in the Japanese currency,” Greetham said.

Keeping the Japanese currency lower is “pretty much” the policy of the Bank of Japan in an effort to keep their currency competitive and to avoid deflation, according to Kernohan. Therefore he expects further action from the Japan central bank to keep the policy on track despite stimulus from the US side.

Graphic showing How a US dollar rebound will help Japan

Kernohan and his team hold the view that the Federal Reserve will raise two rate hikes this year that will strengthen the US currency over the summer. They believe the Japan market is going to bounce back in the summer as well, benefitting from a return of dollar strength.

“We think the Fed will raise rates in the summer, in July. There’s a chance to go in June but I think they would like to wait for the UK referendum result,” Greetham said, adding that the team will be overweight Japan and European equities in their portfolio in the rest of the year.

Japan GDP data

Data from the Cabinet Office showed that Japan’s GDP grew 0.4% quarter on quarter, or an annualised rate of 1.7%, blowing away forecasts for a gain of 0.3% following the downwardly revised 1.1% contraction in the three months prior.

Keith Wade, chief economist at Schroders thinks that whilst it is good news that the economy avoided the recession some had feared, the figures were boosted by an extra spending day as a result of the leap year and Japan’s economy continues to struggle to regain momentum. Wade expects Japan to promote a coordinated push on fiscal policy given the constraints on monetary policy with stimulation in fiscal spending in coming months.

“Adjusting for this takes growth down to a 0.5% annual rate which still avoids recession but leaves activity at a lower level than was seen in the third quarter last year,” Wade said.

The Japanese market the Nikkei 225 moved higher in choppy trade after the country’s GDP data was announced, but finished the day flat.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk