The BOJ may need to hold its position for now, said expert

asiawindowBy Edward Leung

Since early October,while the world held its breath for US Fed’s further action, the move of Bank of Japan (BOJ) has been highly profiled as China’s recent market volatility directly impacted the economies in the region. Even with BOJ’s current expansionist monetary policy and the outflow of Japanese capital into outbound investments such as real estate, BOJ may need to balance its easing objectives with a slow GDP and inflation growth.

Dealing with possible US Fed rate hike and the volatility in the Chinese market since July, the BOJ has been providing liquidity to the financial market. According to BOJ’s meeting policy statement on October 7th , the bank has stated the following objectives:

  1. Raising the re-purchase of the Japanese government bonds
  2. Raising the purchase of Exchange Traded Fund(ETF)
  3. Will continue money market operations
  4. Will continue quantitative easing policies

Since the BOJ has affirmed its expansionist position from October on, effects of the policy was evidently seen in BOJ’s monetary position. According to BOJ’s money supply statistics, the M1, M2 and M3 in July to September 2015 has seen hike by 4.6%, 4.0% and 3.1% respectively from the same period last year.

With a significant hike in money supply, Japanese investors are looking for channels for investments and options include ETFs and real estates.

According to a recent studies by the ETFGI, ETFs and ETPs(Exchange Trade Products) had gathered a total worth of US$36.4 billion in new assets for the 3rd quarter of 2015. Even though the world finance market was in upheaval for much of September, the report estimates that Japanese investors had still allocated US$7.5 billion in new assets to all ETFs and ETPs listed in Japan for household investors.

A similar hike was also seen in the property market. As per a recent estimation by CBRE, the world’s top commercial real estate services and investment firm, Japanese investors had invested US$1.3 billion in the US commercial real estate in 2014.

On the other hand, they had not forgotten about investing in emerging ASEAN markets, of which 39% Japanese investment has gone to developed Asian markets, while 24% has gone to “inemerging” Asian markets.

Other than these sources, China has consistently received a lion share of Japanese real estate investment, which had allegedly reached its peak in 2012, comprising 60% of total Japanese investment in the real estate market. Recently, popular destinations, including Indonesia and Malaysia,came into view due to rapid economic development and the rise of middle class in these countries.

While figures and statistics may have thrown a favorable picture, the performance of Japan’s key economic indicators suggest a much grimmer picture. According to Izumi Devalier, Economist for HSBC Global Research, Japan has not achieved its 2% inflation target, plunging the country into a technical recession for the 3rd quarter of 2015.

Therefore, the Japanese authority may have to downgrade its GDP forecast for the 2015 financial year from 1.7% in July to around 1%, and the inflation forecast may have to be adjusted downward from 0.7% to 0.4%.

Izumi added, “With the BoJ’s easing options limited under the existing monetary policy framework and uncertainties rising over the timing of the Fed lift-off (our US economists expect December), we believe the central bank has every reason to prefer a hold and preserve its bullets.” BM

Japan Average Interest Rate 2006-2015