C. Hoare & Co. | Market commentary

A quick view on...: Japan - 12th April 2013; The Bank of Japan (BOJ)’s new governor Haruhiko Kuroda presided over his first meeting last week. The market had begun to worry that he could disappoint the high expectations that have built up over the last few months for an aggressive monetary policy expansion to try to escape from Japan’s deflationary malaise. Kuroda’s announcement was in fact far more, not less, aggressive than the market had expected, leading to a sharp rise in the equity market (more than 10%) and a fall in the yen (down 5.5% against the US dollar, to 98.7). The BOJ suspended the “banknote rule”, which limits the amount of Japanese Government Bonds (JGBs) that can be purchased. The monetary base will be doubled from ¥138 trillion to ¥270 trillion by the end of 2014 with the monthly purchases increased to ¥7 trillion from ¥4 trillion. That is an expansion in the money supply of 1.3 trillion US dollars in less than two years at a rate about twice as large as in the US as a percentage of GDP. Just as important as the sheer quantity and speed of the monetary expansion is the decision to extend the maturity of JGBs that will now be purchased. This will extend the average maturity of the BOJ’s holdings to seven years from the current three years. This attempt to flatten the longer end of the yield curve is important for its portfolio balance effect of trying to force investors out of longer-dated JGBs and into riskier assets. In this sense, the BOJ is adopting the Federal Reserve’s and Bank of England’s approach to post-crisis monetary policy. The combined package of quantitative and “qualitative” easing represents a complete abandonment of the BOJ’s approach from the last 20 years and a remarkable regime shift. The importance of the intellectual change from the former governor’s insistence that Japanese deflation is a structural phenomenon to Kuroda’s Friedmanite view that inflation is a monetary phenomenon is enormous. On a duration-adjusted basis, the BOJ will “out ease” the Federal Reserve over the next two years, catching up the wide gulf that has emerged since the crisis. Initial reactions have been positive for equities, and seen a further decline in the yen.

Articles: The cases for investing in emerging markets and US financial equities - February 2013; As so much of the bad news that hung over markets in recent years continues to recede, we expect to see an improvement in business and consumer confidence. We believe this will provide a broad-based investment opportunity this year, particularly in equities. Click on the following links to read our views on global emerging markets and US financials. Our view on Global Emerging Markets; Our view on US financials

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