Japan's economy contracts

Aggressive: Japan has been warned that its expansionary monetary policy could affect that country’s future growth as a weak yen could undercut Korean exporters’ competitiveness. — EPA

TOKYO: Japan's economy unexpectedly contracted in the fourth quarter, failing to escape a mild recession and playing into the hands of a government pushing for more aggressive monetary expansion that's drawn international criticism.

While a 0.1% drop in output defied expectations of a slight uptick after two quarters of contraction, economists expect the economy will slowly recover this year with the help of bolder monetary and fiscal stimulus and an improving global economy.

The Bank of Japan also struck a more positive note on the economy while keeping its policy on hold after it boosted its monetary stimulus and doubled its inflation target to 2% a month ago.

Markets, however, have no doubt that Prime Minister Shinzo Abe will keep pushing the central bank for more, given the still fragile state of the economy. A return to rising prices also appears far off after nearly two decades of low-grade deflation.

Those expectations for further easing have sent the yen into retreat, driving it down nearly 20% against the dollar since November and stirring an international debate over whether Japan was effectively using aggressive money printing to steer the yen lower.

Tokyo has defended its action, saying its policies are aimed at pulling the country out of deflation, not at nudging down the yen, and governor Masaaki Shirakawa is expected to reinforce that argument when he will attend his last Group of 20 finance leaders' meeting in Moscow this weekend.

Japan has said the Group of Seven rich nations accepted Tokyo's view when it declared in a statement on Tuesday that fiscal and monetary policies would not be directed at devaluing currencies.

But remarks from former BoJ governor Kazumasa Iwata yesterday are likely to rekindle the international debate on Tokyo's true motives.

The yen is still overvalued from a trade perspective and the reversal of the currency's strength is essential for the BoJ to achieve its 2% inflation target, Iwata was quoted as saying by a Japanese ruling party official.

Iwata, considered one of the leading candidates to replace Shirakawa when he leaves his post in March, said the dollar at 95 yen was appropriate. Iwata heads a private economics think-tank and now has no policymaking role.

Abe and his cabinet have the right to fill three top BoJ posts when Shirakawa and his two deputies leave on March 19 and is widely expected to pick advocates of more aggressive central bank action than the cautious outgoing chief, keeping downward pressure on the yen.

The dollar traded around 93.50 yen yesterday after hitting a 33-month high of about 94.47 yen on Monday.

South Korea's central bank has warned that Japan's expansionary monetary policy could affect that country's future growth as a weak yen could undercut Korean exporters' competitiveness.

As widely expected, the central bank maintained its overnight call rate target at a range of zero to 0.1% by a unanimous vote, and held off expanding its asset buying and lending programme, while offering a rosier view of the economy than just a month ago.

“Japan's economy appears to be bottoming out,” it said. In January, the BoJ said the economy was weakening.

The world's third largest economy contracted for the third consecutive quarter in October-December, showing Japan was taking longer to escape from a mild recession. - Reuters

QE3: Get ready for influx of cash!

QE3 set to boost confidence but experts warn against simply loading up on equities.

A RIVER of cash is likely to wash over the global financial system soon, thanks to decisions by major central banks to unleash their monetary “bazookas” on the faltering global economy.

The money-printing ball started rolling last month when the European Central Bank (ECB) said it would make “unlimited” purchases of bonds from countries such as Italy and Spain.

The US Federal Reserve was next, announcing that a third round of asset purchases, known as quantitative easing (QE3), would start at the rate of US$40bil (RM122.5bil) a month until the job market recovers “significantly”.

It was soon followed by the Bank of Japan, which said it would extend its asset-purchasing scheme by 10 trillion yen.

A big chunk of that excess liquidity will likely flow into Asian financial markets as investors search for better returns, given the low interest rates in most countries.

It is tempting to think investors can simply load up on equities and ride a rally like previous rounds of quantitative easing but this is not so, say experts.

They believe that while QE3 will boost confidence and support markets, the euphoria will be checked by the reality that the real economy is in the doldrums.

The list of worries is long: China is decelerating fast, Europe remains mired in recession, and many US consumers are still looking for jobs.

With countervailing forces at work, wealth managers and analysts have plenty of ideas on what to buy and what to avoid.

Buy
> US, Asian equities 

Analysts believe the flood of money will do much to support markets, but not all will do equally well.

UBS Wealth Management regional chief investment officer Kelvin Tay believes defensive bourses such as Singapore and Malaysia will do less well than markets such as Taiwan, Hong Kong and China.

He added that what is also likely to boost shares in Asia, outside of Japan, is simply that some stock markets look cheap, based on a metric known as price-to-earnings ratio. Shares could rise 12% from current levels, he said.

DBS regional equity strategist Joanne Goh said the bank recently recommended an “overweight” for Chinese and Hong Kong stock markets, indicating that investors should buy into these markets. These markets are likely to do well because they are large, open and undervalued, she added.

Analysts’ views were slightly more mixed about US equities, with some believing they will get a boost from QE3, while others warned that the impact would be limited.

Matthew Rubin, Neuberger Berman’s director of investment strategy, said American shares do look relatively cheap compared with investment-grade bonds.

“The additional liquidity should further support a rise in prices,” said Rubin, who helps set strategy at the fund, which manages assets of US$194bil (RM593.9bil).

But Sean Quek, Bank of Singapore’s head of equity research, said past experience shows that US equities benefit less from quantitative easing.

“Also, current valuations are less attractive versus previous QE periods as well as global peers,” he said, adding that he has a neutral rating on American shares.

> Gold

Most analysts believe stocking up on gold and gold-related assets is a good move.

First, with the amount of cash expanding in the system, there could be the risk of higher inflation. And with the value of the currency likely to fall due to the huge amounts of cash flowing about, investors will want “real assets” to protect themselves.

Rubin noted: “Real assets such as precious metals will act as inflation hedges and are per­ceived as diversifiers to holding fiat currency.”

Chew Soon Gek, head of strategy and economic research for the Asia-Pacific at Credit Suisse Private Banking, believes precious metals will outperform other commodities.

“They are the most sensitive to monetary easing, inflation expectations and real interest rates,” she said.

She tips gold to hit US$1,850 (RM5,663.80) per ounce in a year, from the US$1,760 (RM5,388.40) now.

> High-yield securities

With interest rates likely to stay near zero for the next two years, analysts believe that the demand for high-yielding securities will remain strong.

In particular, companies that pay a good dividend and have strong balance sheets are likely to attract investors, say analysts.

“With the QE expected to suppress yields and the Fed’s commitment to keep interest rates low until mid-2015, dividends will remain an important driver of total returns,” said Quek.

He noted that firms giving investors good payouts have generally performed better in the past two years when rates have fallen.

Rubin also believes that high-yield corporate bonds as well as real estate investment trusts are good places to park money.

“The search for yield in a low interest rate environment will continue,” he said.

Avoid
> US dollar 

If there is one asset class that most analysts believe is to be avoided, it is the greenback.

The flood of US dollars into the system through QE3 will lead to what analysts term a “debasement” of the currency – essentially a depreciation. In fact, Rubin believes that cash, and not just the greenback, should be avoided.

“QE3 increases potential for inflation and depreciation of the dollar,” he said.

This may also affect Singapore investors who have taken positions in US equities, as the currency may erode gains or increase losses due to the exchange rate. Likewise, investors might want to avoid the euro.

The poor economic outlook and flood of cash into the market will likely send it down against Asian currencies such as the Singdollar.

Uncertain
> European equities

For investors who take a riskier approach to investing, European stock markets do offer an option. After all, some of the best bargains are made when everyone else is deserting them, said Henderson Global Investors.

The asset management firm said that even though the outlook is gloomy, many firms remain healthy, with global operations.

But Quek is cautious on the region, simply because many question marks over the overall health of the economy remain.

A recent run-up in share prices there, as a result of the ECB’s unlimited bond purchase decision, has also made European stocks more expensive and less attractive, he noted. “As such, we are maintaining a negative stance on Europe.”

> Property 

While previous rounds of quantitative easing may have been one of the causes of property price inflation, this may not be repeated with this latest round.

Singapore has introduced the additional buyer’s stamp duty of 10% that foreigners incur when buying homes. Tay thinks that while QE3 may keep property resilient, price rises will be capped.

But QE3 could still end up boosting the appeal of US property, says Dr Lee Boon Keng, head of the investment solutions group for Singapore at Bank Julius Baer, noting that the housing conditions were improving and rebounding from historical lows.

“The US economy continues a moderate recovery, aided by rising property prices which should have a multiplier effect on consumption and investment,” he said. — The Sunday Times/Asia News Network

By AARON LOW

 Related posts/articles

QE3 triggers fear of new currency wars! What it means?
New global currency wars warning!  QE3 triggers fear of new currency wars! What it means?

QE3 triggers fear of new currency wars! What it means?

A man watches the foreign currencies exchange rate in Rio de Janeiro, Brazil

Fear has crept into the foreign exchange markets: fear of central banks. Currency traders are rapidly shifting assets to countries seen as less likely to try to weaken their currencies, amid concern that the fresh round of US monetary easing could trigger another clash in the “currency wars”.

Fund managers are rethinking their portfolios in the belief that “QE3” – the Federal Reserve’s third round of quantitative easing – will weaken the dollar and trigger sharp gains in emerging market currencies. Such moves would cause a headache for central banks worried about the domestic impact of a strengthening local currency, leading to possible intervention.

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Some investors are allocating money towards countries with beaten-up currencies, such as India or Russia, or those with more benign central banks, such as Mexico, that do not have a history of frequent forex intervention.

Currencies whose central banks have either intervened or threatened to intervene since QE3 have been underperforming the US dollar as investors have steered clear.

The Czech koruna is the worst-performing major currency against the dollar since QE3 was launched this month, according to a Bloomberg list of expanded major currencies. The governor of the Czech central bank last week raised the prospect of forex intervention as a tool to stimulate the economy.

The Brazilian real is also weaker in the past two weeks after Guido Mantega, finance minister, made it clear that the government would defend the real from any fresh round of currency wars sparked by the Fed’s move.

Even the Japanese yen is weaker against the dollar overall since the Fed’s move, despite having clawed back all its losses after the Bank of Japan’s move to add to its bond-buying programme last week.

Currency desks at Baring Asset Management and Amundi are avoiding the Brazilian real, which the country’s central bank keeps managed at around R$2 against the US currency, and are instead buying the Mexican peso, where the central bank has signalled it is happy for the currency to appreciate further.

James Kwok, head of currency management at Amundi, said: “Mexico is an emerging market currency many managers like as they believe the central bank won’t intervene. The Singapore dollar and the Russian rouble are managed by a range, instead of one-way direction, and so are also good candidates for QE play.”

He is concerned that another “big scale” intervention from Tokyo is on the cards after the BoJ failed to weaken the yen substantially this month, and is avoiding the currency as a result.

“We definitely take the intervention risk into account when investing in a currency,” says Dagmar Dvorak, director of fixed income and currency at Barings. “In Asia, intervention risk is fairly high. We have still got positions in the Singapore dollar but remain cautious on the rest of the region.”

Other investors are opting for currencies that have weakened substantially this year. Clive Dennis, head of currencies at Schroders, says: “Russia and India have currencies with strong rate support and levels which remain well below their best levels of the last year, hence pose less intervention risk. I like owning those currencies in a US QE3 environment.”

Some currencies are strengthening on a combination of Fed easing and domestic factors. While the Indian central bank is not seen as likely to intervene to stem any appreciation in the rupee, the currency has also been popular this month due to a reform package from the Indian government aimed at stimulating the economy.

Commodity currencies including the Russian rouble are responsive to expectations of a rise in commodity prices fuelled by Fed easing, while investors view the Mexican peso, along with the Canadian dollar, as a play on any economic recovery in the US because of their strong trade links.

However, some investors believe the QE3 effect could be lower this time. They argue that central banks in emerging markets face a tough decision over whether to weaken their currencies to help struggling exporters and stimulate growth, or allow them to strengthen to offset the impact of rising food prices.

In fact, the US dollar has shown signs of resilience since QE3 as fears over the health of the eurozone continue.

While flows into EM debt and equity funds rose substantially last week, according to data from EPFR Global, Cameron Brandt, research director, says this week’s flows looked more muted: “There’s a certain amount of reaction fatigue setting in.

By Alice Ross, FT.com

What QE3 means for China and rest of Asia?

 

China recently announced plans to boost spending on subways and other transportation infrastructure to boost its economy. But China may not be as aggressive with stimulus as the Federal Reserve and European Central Bank.

NEW YORK (CNNMoney) -- Peter Pham, a capital market specialist and entrepreneur with expertise in institutional sales and trading, is the author of AlphaVN.com, an investing blog focusing on Vietnam and other markets in Southeast Asia
 
Now that most of the developed world's major central banks have all committed to some form of open-ended quantitative easing, we can start to make some concrete predictions about the effects this will have in Asia.

In general, QE is being undertaken in the West to stabilize debt markets that are deflating. So this may do little to actually stimulate sustainable economic growth. But, the uncertainty as to whether the central banks would act aggressively kept a lid on many emerging growth markets for months. Here's what may happen next.

China has been lowering interest rates but it cannot afford to do print money to buy bonds like other central banks have done. China's central bank can still announce more fiscal stimulus due to its strong trade surplus. The recent plan to spend $156 billion on domestic infrastructure is significant, but compared to the amount of money the Federal Reserve and European Central Bank may wind up spending, it might was well be $156.

The political situation in China is proving to be more volatile than we may have originally thought as the response to Japan's buying the Senkaku islands seems completely out of proportion with the level of threat or even insult this is represents. It speaks to a party that needs to redirect anger at its own mishandling of the economy.

That this is coming just a few months after Japan and China signed the most sweeping currency and trade agreement of any that China has signed with another country seems very odd.

Japan's response to the QE announcement by the Fed was to extend their existing QE program another 10 trillion Yen (~$128 billion US). That may sound like a lot but it's even less than China's most recent stimulus program.

This suggests that the Bank of Japan is uninterested in printing to oblivion at the same rate as the Fed and ECB, and that Japan will manage the yen's rise while shifting its focus towards more regional trade. Japan and China are each other's largest trading partners, which makes this row over the Senkaku Islands seem manufactured to force the Japanese to choose a side in the growing cold war between the U.S. and China.

So far, Japan has been trying to work with both sides. It is helping to internationalize China's yuan currency and is giving China a clear alternative to U.S. Treasuries with its own bonds. At the same time, Japan has stepped up its purchase of Treasuries, buying more than $200 billion's worth in the past 12 months.

I expect the Bank of Japan to continue to try and position the yen as an alternative regional reserve currency as other Asian nations like Thailand, Malaysia and Indonesia try to lessen their reliance on the U.S. economy.

By keeping the yen strong versus the euro and the dollar, Japan can attract capital from overseas and use it to deploy it around Asia. There should be enough money sloshing around the region so that Asian nations can continue their trade with the West at current levels while also focusing more on regional growth.

The economies of Indonesia, Thailand and Malaysia are already growing above expectations this year despite volatility in their currencies because of the fear over Europe. With worries about Europe starting to wane, these countries, as well as the best companies in them, should have little trouble raising capital through bond sales.

The wildcards for Asia are Hong Kong and Singapore. We're already seeing signs of a property bubble in Hong Kong thanks to the Fed's four-year old policy of interest rates near zero. That's because Hong Kong's dollar is nominally pegged to the U.S. dollar.

Now that the Fed has implemented a program that will further debase the dollar -- and expand its already bloated balance sheet -- Hong Kong is being forced to reassess its currency peg. If they do not make changes, this could result in an even bigger property bubble. That would lead to loan problems for Hong Kong banks similar to those plaguing those in the U.S., Europe, China and, to a lesser extent, Singapore.

Since the Monetary Authority of Singapore (MAS) pegs its interest rates to that of the Fed, its economy is vulnerable to a property bubble like the one in Hong Kong. Inflation is currently above 4% and has recently been above 5%. While Singapore's banks are all very well capitalized and their foreign exchange reserves are higher than their annual GDP, the Fed's QE3 policy will put pressure on an economy already dealing with sluggish growth.

But all in all, the latest round of QE is mostly bullish for Asia as it creates some certainty after the past 12 months of extreme uncertainty. Even though the actions by central banks in the West appear to indicate that their economies are worse than the headlines make it seem, the mere fact that the Fed and ECB have acted should reassure investors throughout Asia.

By Peter Pham @CNNMoneyInvest
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