Japanese equities have NOT been the place to be so far this year. The Nikkei is down 10% since January 1 and now, after five straight quarters of GDP growth it would seem the economy is about to be stopped in its tracks.
“It looks like the second quarter GDP is headed for a big negative number,” says LPL Financial’s Jeff Kleintop, “but in response to that they may whip out some more quantitative easing.”
Kleintop points out that Japan is sort of the birthplace of the quantitative easing principle, something they used for the first time in 2001. With QE came all sorts of potential drawbacks, especially given the fact that Japan already raised tax rates which arguably got them into this mess in the first place.
“It’s [QE] worked for them lately,” argues Kleintop. “They’re likely to do more, and I’m talking a lot more, like Godzilla sized QE. Not 1954’s little Godzilla. I’m talking about 2014’s towering monster...that type of QE is coming later this year to pull them out of this rut they’ve fallen into...The hope is to stimulate some consumption -- if you create the impression that inflation is going higher and that things are gonna cost more in the future.”
If it does the LPL chief market strategist says it could be a banner summer for Japanese stocks. “Look back to 2012 when they announced this Godzilla sized quantitative easing. Stocks took off, could be the same thing and lead to a blockbuster summer for Japanese equities.”
Still there are no guarantees. Given the NIkkei’s rough first half it’s not a trade to jump into without doing your homework. Still, Kleintop says, “If they deliver on this promise / potential of an enormous quantitative easing program, not only are they intending to bring that monetary base to 270 trillion Yen by the end of the year but if they increase that or say that it’s going to extend beyond the scheduled end at the end of 2014 that’s great news. I think that could reverse this 10% decline we’ve seen in Japanese equities.”
The next big clue will come when the Bank of Japan holds their next monetary policy meeting in mid-June.
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- quantitative easing