Bank of Japan takes a more flexible approach to monetary policy

During the first half of July, the Japanese market declined on the back of concerns over trade frictions and the weakness of the Chinese market. This said, the market later started to recover following strong economic growth in the US and a depreciating JPY against the US dollar, as well as decreasing tensions surrounding trade frictions and fiscal policy announcements in China.

Monthly Fund Commentary
22 Aug 2018

During the first half of July, the Japanese market declined on the back of concerns over trade frictions and the weakness of the Chinese market. This said, the market later started to recover following strong economic growth in the US and a depreciating JPY against the US dollar, as well as decreasing tensions surrounding trade frictions and fiscal policy announcements in China.

In late July, the market’s interest shifted to changes in the BoJ’s monetary policy, which were announced on the last day of the month, with bank stocks rallying following rising interest rates.

At the beginning of July, the Japanese market declined following uncertainty over trade frictions between the US and China. After the first round of US tariffs on Chinese imports were put into action on 6th July, the market rebounded, anticipating that negative news flows were over.

The US market rallied after positive US employment figures were released, with the Japanese market following suit later in the month. In mid-July, economic sensitive stocks and exporters increased as both, a rise in crude oil prices and an appreciation of the US dollar against the JPY were anticipated. This said, the Japanese market (and especially China related names) started to soften shortly after on the back of a declining Chinese market and weakening Yuan. Said names however later rebounded when the Chinese government announced its aggressive fiscal policy on 23rd July.

In late July, the yield on 10-year Japan Government Bonds (JGBs) rose on speculations that the BoJ would change its monetary policy, triggering a surge in bank stocks. On the last day of July, the bank however only announced a moderate adjustment to its policy, leading these stocks to drop again. Later in the month, the ratio of the Nikkei 225 over TOPIX also declined on the back of speculations that the BoJ would change the index weightings.

The TOPIX closed the month at 1,753.3 (up 1.3% MoM), with the Nikkei 225 ending at 22,553.7 (up 1.1% MoM). In terms of sector performance, 23 out of 33 sectors gained. The best five performers were oil, mining, banks, steel, and communication, whereas the worst five performers were retail, foods, fishery & agriculture, textiles and services.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31st July 2018 gained 2.6% compared with that of 29th June, while the TOPIX rose 1.3% during the same period. The Fund put one new name (Obayashi Corp) into the portfolio with one stock (Isuzu Motors) sold out.

The 10-year JGB yield opened at 0.036% and was moving in a fixed range until media started on the evening of the 20th July to report that the BoJ was seeking to relax its monetary policy, indicating a potential raise in its long-term interest rate target. The JGB market plunged on Monday 23rd, with the 10-year rate rising steadily until the end of the month, at one point reaching 0.123%, but ending at 0.062%.

On 20th July, Japan enacted a law (Integrated Resorts (IR) Bill) outlining a road map for casino resorts. There is still a long road ahead, but talks between Japanese companies and Western operators are likely to become more serious now as the government has given the green light. Municipalities will eventually start requesting proposals from consortium groups that want to pitch their plans. One still has to wait for a couple of years before blueprints come out with information on what kind of projects are planned, where they are planned and who the respective partners will be. It is very likely that these projects will have an impact on a variety of industries such as construction, transportation, gaming, tourism, retail, financing, technology and the like, with trillions of yen of capital investments anticipated.

Further, it should be one of the core growth strategies for the Japanese economy after the 2020 Olympic Games in Tokyo. Initially people feared that the economy would stagnate again after the Olympic Games, as previously experienced in 1964. The fear should however now be wiped out, as construction giants should benefit significantly.

On 31st July, the BoJ announced a set of monetary policy changes for the first time in almost two years, outlining a more flexible policy designed to let long-term interest rates move “more upward and downward”, increasing the range from between -0.1 and +0.1 to between -0.2 and +0.2 for 10 years JGB. Mr. Kuroda, the BoJ governor, stressed that the BoJ would continue to maintain interest rates at extremely low levels for an extended period, but that this change should be interpreted as the beginning of financial normalisation, as negative side effects from ultra-loose monetary policy have started to appear in the financial system. As such, the financial sector, notably banks, may become a leading engine for the rally after years of underperformance.

On 1st August, leaders of China’s Communist Party agreed at a politburo meeting to adjust the official monetary policy stance, adapting a loosening stance, following a series of growth-supporting measures such as tax cuts and infrastructure spending announced over the past couple of weeks, as a response to trade frictions with the US, which may threaten the economy. This should be positive for global economic stability.

The Fund is increasing exposure to a large construction Company, which has a strong business base in Osaka, where one of three casino resorts is very likely to be located. The Investment Adviser remains quite confident regarding the outlook of both, the Japanese and world economy, which is why the Fund is overweight with regards to economic sensitive sectors such as energy, banking and machinery. At the same time, defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided. In terms of performance, the Fund has outperformed the index in July, since energy and banking stocks have performed well. YTD the Fund’s performance has been negatively impacted by banking and cyclical stocks, which have suffered as a result of the continuing global trade frictions.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 10/08/18 and are based on internal research and modelling.

For detailed performance information based on complete 12-month periods since inception, please refer to the Fund’s factsheet, which is obtainable from https://eisturdza.com/funds/fund-documents.