Japanese stocks rocketed to a seven-year high on Friday, while the yen plummeted after the Bank of Japan decided to further ease policy in reaction to the continuing lethargy in the economy.
Following the conclusion of its latest monetary policy meeting, the BoJ announced it would raise the annual stimulus to ¥80 trillion (£424bn) – up from ¥60-70tn (£337bn) in an effort to get closer to its 2% inflation target, its first increase in over 18 months.
Funds for buying government debt will receive an additional ¥30tn (£168bn), with the average duration being extended to around ten years.
The central bank also announced plans to triple acquisitions of exchange-traded funds (ETF) and Japanese real estate investment trusts.
Anna Stupnytska, global economist at Fidelity Worldwide Investment, was taken aback by the policy change.
“The timing of this policy move was a complete surprise to everyone as most had been pushing expectation of a change in policy into 2015,” she said. “This change in policy will increase expectation that Japan can get close to achieving its stated 2% inflation target by the end of next year.
“It is also a clear signal from the BoJ that it is wants to see a real reallocation among domestic investors to more risk assets,” she said.
“It is not just monetary stimulus in Japan though as the earnings season has been another positive factor for investors – with about a quarter of companies having reported, we have seen profits up 16.5% versus the same period a year ago. This figure is 4.4% higher than expectations. We also have seen a marked increase in dividends and share buybacks.”
However, Tony Lanning, portfolio manager of JP Morgan Asset Management’s Fusion range, was unsurprised by the BoJ’s decision, but agreed it showed the BoJ’s commitment to reflating the economy.
“Granted, the timing of the decision was earlier than we expected and while the nominal increase in asset purchases may not appear large, it is further confirmation that the Bank of Japan remains fully committed to its target of reflating the economy.
“The decision to act now, rather than December or early next year, was driven largely by the recent sharp decline in commodity prices and hence inflation expectations. Should the BoJ be successful in its mission to raise long term inflation expectations the key beneficiary will be financials.”
Lanning said that increasing his weighting to Japan at the expense of European and UK equities indicates his conviction to the sector.
He added: “Whilst most major equity markets can be considered fully valued, Japanese equities still offer significant upside, hence Fusion’s significant overweight to the region.”
Lanning’s Fusion Growth Plus has 17.5% allocation to Japan, 14% of which is currency hedged.
