Former Bank of Japan (BoJ) board member, Makoto Sakurai, has said that the fall in bond yields and more stable yen gives incoming governor Kazuo Ueda time to consider modifications to yield curve control. However, no change is to be expected before July as policymakers monitor global growth and Japanese wage negotiations. “The new governor Ueda well knows that he will lose everything if quick action spoils the economy and prices… The most important issue is how Japan’s economy and wages develop in the coming months and their outlook,” said Sakurai, underscoring the influential role wage negotiations will have in shaping the BOJ’s thinking on whether the 2% inflation target can be achieved in a stable and sustainable manner.
Sakurai’s point is key – wage negotiations will have a significant influence on Japan’s economy in the short and long term, particularly in light of the BOJ’s labour shortage. The unemployment rate stands at its lowest level in 25 years, prompting companies to offer higher wages in a more competitive atmosphere. Wage negotiations typically begin in March and April, providing the BOJ with insight on the scale of wage growth it can anticipate. However, the outlook is unclear with several major companies having already delayed wage negotiations until after the government’s labour campaign in June.
The absence of a clear driving force behind the recent rally in Japanese stocks has led Goldman Sachs to suggest it is driven more by accumulated capital within the country’s pension scheme than by economic fundamentals. According to Bloomberg, the plan has an estimated ¥137tn ($1.2tn), of which only a small amount has been invested in equities; a report from Itochu Pension System has suggested that if all of Japan’s pension funds allocated the minimum mandated 25% of assets to stocks, it could boost the stock market’s value by around $400bn.
In other markets, China’s economy is evidently strengthening, with Q4 2016 GDP coming in at +6.8% YoY, up from Q3’s 6.7%. Quarterly growth was also up from 1.8% in Q3 to 1.9% in Q4; the first time the economy has seen growth accelerate for two consecutive quarters since 2015. Whilst concerns remain around China’s debt pile, it is worth noting that investment as a share of GDP fell to 43.1% in 2016, from 45.9% in 2015, and is projected to fall further this year according to Nomura.
The election of Donald Trump and his protectionist agenda has undoubtedly raised the idea of major corporations returning production capacity to the US. However, Goldman Sachs believes these claims are misplaced, stating that offshoring to Mexico “is not happening to the degree that has been claimed in the political discourse”. From the period of 2000-2004, offshoring trended upward, but has since stabilised, with 2013-2015 averaging at 1,200 jobs per month – a rate that continues today. Offshoring to China peaked in 2005, but has now declined to fewer than 2,000 jobs per month. Furthermore, around 75% of the offshoring to Mexico goes to industries that will grow regardless of Trump’s policies.
Meanwhile, trade relations between the US and China could soon be tested; having accused China of manipulating its currency during his campaign, concerns resurfaced after China’s annual growth data encouraged renminbi buyers. Trump and his incoming Treasury Secretary, Steven Mnuchin, are expected to pressure China on currency and trade as soon as the latter’s appointment is confirmed. Mnuchin has criticised the currency manipulation charge, stating that it will not be his first choice of method to increase US exports.
Donald Trump, however, could be extremely supportive of infrastructure, as well as the banks that will finance and benefit from it, according to a report from Citigroup. Jeffrey Aronson, principal at Centerbridge Partners, suggests, “if deregulation gives a big enough stimulative effect, we’re going to see a very strong economy… then Trump can safely say he’s going to raise interest rates in order to head off inflation. Folks at the Fed will be very happy.” That said, government spending could increase the US deficit, leading to sustained increases in US interest rates, posing a risk to the economy.
Emerging market equities have proven to be a popular target with investors in 2017, with the MSCI EM index more than doubling the performance of the Nasdaq Composite Year-to-Date, with a 5.5% vs 2.5% gain. In addition, consumer staple stocks have outperformed the S&P 500, climbing 4.5%, compared with 1.6% for the index. Factors behind this success include the resurgence of the dollar, the stabilising of commodity prices and the prospect of Trump’s infrastructure boost. However, there is reportedly some overheating in the Indian stock market – the rally is primarily driven by domestic liquidity as foreign investors have invested less than $1bn in the last five months – and the threat of China tightening capital controls could have ramifications for larger emerging markets too.