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Current Views

May 17, 2013: Japanese Policy Drives Investor Excitement

Thoughts from our Domestic Equity Team

Many of the world’s major economies are operating under divergent policies. Governments are taking actions to reduce budget deficits while at the same time their central banks are flooding financial systems with copious amounts of liquidity. Put another way, fiscal policy is tightening while monetary policy is loosening. This is certainly the case in Europe, where the sovereign debt crisis has forced governments into implementing various austerity measures. Europe’s central bank on the other hand, just cut its benchmark interest rate to an all-time low of 0.50% in an attempt to spur lending and foster growth. The situation is similar here in the US. Just as the sequester begins to make its presence felt as a drag on the economy, the Fed is busy purchasing $85 billion worth of fixed income securities per month in an attempt to bring down the unemployment rate.

Japan stands out as a glaring exception. Driven by recently elected Prime Minister Shinzo Abe and newly appointed Bank of Japan Chairman Haruhiko Kuroda, the country is aggressively pursuing its growth agenda via both fiscal and monetary strategies. Though it remains to be seen how successful these initiatives will be in boosting the economy and ending a multi-year period of deflation, investors are growing increasingly optimistic. Japan’s Nikkei Index has trounced all other major stock markets thus far in 2013, rising nearly 50% on a year to date basis. While it is impossible to quantify, it seems reasonable to assume that Japan’s double barreled initiative, in contrast with the incongruous efforts being deployed elsewhere, is a key reason for this stark outperformance.

Submitted by: Jason Sheer, CFA – Portfolio Manager

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