RAM Ratings: Japan surprises by adding stimulus

Published on 05 November 2014 Two days after the US Federal Reserve announced the end of its quantitative easing (QE), the Bank of Japan (BOJ) has surprised markets by expanding its asset-purchase programme. The BOJ’s unexpected move is in line with its bid to shore up waning consumer prices and ease falling household spending. “The latest shot in the arm is envisaged to provide a short-term boost to the Japanese economy while structural reforms gain stronger traction in the long run,” observes Esther Lai, RAM Ratings’ Head of Sovereign Ratings. Japan is rated gAA3(pi) by RAM on the global scale, with a stable outlook. The BOJ’s decision to further expand Japan’s monetary base at an annual pace of JPY80 trillion, from JPY60 trillion-JPY70 trillion, comes amid concerns over a persistently weak domestic environment after the  consumption tax hike in April and a still-fragile recovery on the external front. The BOJ intends to increase its government debt holdings by JPY80 trillion per year (compared to the previous JPY50 trillion) and also triple its annual purchases of exchange-traded funds and REIT funds, which could help boost real-estate and stock prices. This move coincides with the Government Pension Investment Fund’s revised strategy of increasing its equity investments. As long-term interest rates and 10-year government bond yields dip further, capital investments and investments in the housing market could pick up. A slow recovery in consumption after the April sales tax hike and weak industrial output have taken a toll on the Japanese economy. Although recent upticks in inflation had been primarily fuelled by the higher consumption tax and more expensive imports amid a weaker yen, we note some improvement in the job market, which bodes well for Japan’s moderate recovery. The steep fall of the yen following this additional monetary stimulus will drive up import prices, unless commodity prices continue retracing. This will undoubtedly exert pressure on Japan’s trade balance. Nonetheless, the country’s gAA3(pi) rating is underpinned by its exceptional external strengths, buoyed by its considerable reserve buffer and the reserve-currency status of the yen. As at end-September 2014, Japan held USD1.3 trillion of foreign reserves – the world’s second-largest coffer. This translates into exceptional external liquidity that covers 16 months of its current-account payments. Media contact Lynette Lee (603) 7628 1182 lynette@ram.com.my