Tokyo rallies

4 November 2014

Much more than a mere quiver of vitality has shaken financial markets in the past few days thanks to the Bank of Japan, which, on October 31st, in perfect step with the Japanese government, announced a series of measures exciting financial operators. First, the BoJ announced it would start buying bonds in forthcoming weeks, and more than that, it would also acquire assets like ETFs and REITs, which it deems useful in expanding its monetary base. The announcement sent the Nikkei rocketing 4.83% in a few short hours.

It is no coincidence that, on the very same day, Japan’s Government Pension Investment Fund announced its plans to change the asset allocation of its portfolio. Accordingly, we can expect its domestic equity allocation to grow from 12% to 25% as it reduces the domestic bond component from 60% to 35%. In addition, foreign bonds and equities will all increase above expectations, from 11% to 15% and 12% to 25%, respectively, while the fund’s international allocation will in turn be notched up to 17%. According to Kairos experts, the Japanese pension fund has been preparing for this move for some time, as it has been buying heavily since May at both highs and lows, but without generating any big changes until now.

These two time bombs were set for just the right time and were, above all, perfectly synchronized to give markets the maximum jolt. However, partly hampering bullish souls is the fact that this continuance of Japanese quantitative easing and the GPIF’s moves pave the way for another VAT hike, considered necessary to restore inflation, with the inevitable adverse effects on growth. Abe’s administration will soon need to decide what to do about this, and so it is easy to predict that additional stimulus might be required.