Vanguard sees signs of Japan inflation

Recent increases in Japanese prices will encourage consumers and businesses to spend now


TOKYOVanguard Group says a pickup in Japanese prices will boost the country’s equities, unlike in the US where fears over inflation sent shares tumbling into a correction.

The US$4.9 trillion (RM19.06 trillion) money manager says recent increases in prices — and expectations for that trend to continue — will encourage consumers and businesses to spend now, rather than waiting. It’s a textbook definition of breaking free of the deflation that haunted the country for 15 years, as espoused by Bank of Japan (BoJ) governor Haruhiko Kuroda. But there’s one slight difference: In Vanguard’s view, it doesn’t really matter if the BoJ fails to reach its 2% price target anytime soon.

Japan’s key inflation gauge rose 0.9% from a year earlier in December, up from an increase of 0.1% in January 2017. The prospect of higher prices, as well as cheap valuations, are reasons that Vanguard is “most positive” about Japanese stocks, along with those in Europe. It expects those regions — and almost everywhere else — to do better than the US in the long run.

“As long as people are expecting prices to increase down the road — no matter whether it’s 1% or 2% — you’ll expect things to be more expensive than today,” Qian Wang, Vanguard’s chief economist for Asia Pacific, said in an interview in Tokyo. “Then, they will spend and they will invest.”

In January, the BoJ said inflation expectations remained more or less unchanged, an upgrade from its previous assessment that they were weakening. To Wang, the recent market rout and spike in volatility isn’t a huge surprise. Elevated valuations, particularly in US equities, meant that even a slight acceleration in inflation or signs of hawkishness by central bankers could easily translate into heightened turbulence. The Cboe Volatility index volatility gauge surged to a record earlier this month, while the S&P 500 Index fell more than 10% from its recent peak.

Japanese equities followed suit, with the benchmark Topix Index sliding more than 6% so far this year before trimming declines. But losses for stocks with a domestic business focus were less severe, as the yen’s surge against the dollar weighed on exporters. The Topix jumped 2.2% yesterday, gaining for a third straight day.

A resurgent yen should be less of a concern for Japan stock investors as its correlation to local equities will weaken, backed by stronger performances by companies with a domestic focus, according to Wang. In any case, she says she doesn’t expect significant appreciation in the currency, because Kuroda will probably keep easy policy in place this year. Last Friday, Prime Minister Shinzo Abe nominated the BoJ governor for another five-year term.

While emerging markets are cheaper than Japan, Vanguard is “more cautious” about them. Reduced investor risk appetite, if sustained, could hurt those markets more, Wang said. On the US, she says valuations are still at an “elevated level” even after their sell-off.

Globally, Vanguard is less optimistic. The money manager lowered its 10-year global equity return outlook to a range from 4.5% to 6.5% in December, down from 5% to 8%. The firm was most bullish in 2009 when markets were reeling from the global financial crisis. But Wang is no longer as positive, she said.

“Now, I would say more cautious,” Wang said of the outlook for global stocks. But “we are quite positive about the Japan equity market this year”. — Bloomberg