Bank of Japan: going large Premium

Move over Mario Draghi and Ben Bernanke. Investors have a new favourite central banker: Haruhiko Kuroda. The Bank of Japan governor has begun his tenure with measures impressive enough to spice up a stock market that had creeping doubts that Abenomics would turn out to be much more than talk.

Few investors have ever met a package of easy money measures they did not like. But enough have been disappointed by Japan’s overly cautious attempts to counter deflation over the years to make the intent and scale of these measures a little different. Doubling the monetary base and extending bond purchases to all maturities are undeniably bold. But expectations of action on this sort of scale had already doubled trading volumes and lifted the benchmark indices by two-fifths since mid-November when Shinzo Abe was assumed to be the incoming premier. Are more gains justified before seeing the result of Mr Kuroda’s largesse?

The answer is “not really” on a fundamental basis. But they may happen anyway courtesy of foreign investors and the yen. Doubling the monetary base will weaken the yen and promote risk-taking such as stock buying. The correlation between yen moves and the Nikkei is at its highest since the early 1990s, according to Citi. Foreign investors have been net buyers of Japan for four years but have become even more enthusiastic in recent months and hold about a quarter of the Topix, according to CLSA.

There is little reason why Mr Kuroda’s whatever-it-takes stance, reminiscent of the best bits of Mr Draghi and Mr Bernanke, is going to deter them. And local funds and financial institutions that have been selling equities for deflation-friendly bonds will have to reverse course if inflation does take hold. That, of course, is a big “if”. Prices are still falling and expectations of rises are muted. But the bulls are unlikely to dwell on this when it still seems to be enough to have a big, liquid, underperforming market coming good. Mr Kuroda’s positive surprise will only boost that thinking.

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