The yen had been falling over the past two months. The new Prime Minister has made some quite forthright comments. Expectations have been built up to board aggressive fiscal incentive, while pushing Bank of Japan to take bold monetary easing steps. As a result, there is a Bank of Japan (BoJ) meeting on January 22.
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Given political pressures, BoJ is widely expected to set an inflation target of 2 percent and ease the policy further. In an interview to CNBC-TV18, Adrian Foster, Financial Head-Research at Rabobank says, "a two percent inflation target will not have too much significance in the near term as they haven’t met the one percent target yet".
"They have been sitting on ultra easy policy for couple of years now. Perhaps the market is a too optimistic on options that could come out of BoJ meeting", he adds.
Below is the edited transcript of his interview to CNBC-TV18
Q: What is the sense you are making from the kind of fall we have seen in both the Shanghai and the Japanese markets? Are you getting a sense that these markets have gotten ahead of themselves?
A: Its worth just taking Japan in particular out of the regional trend if you like. Japan in particular was causing quite a strong rally in the equity markets in the recent months as indeed the Yen has weekend.
It hasn’t been translated directly into some of the other Asian markets. It’s been a bit of story on to itself. That’s the way to look at what we have seen in the last couple of sessions. We saw comments from the economy minister yesterday highlighting some costs to a week Yen to the broader economy. That’s seeing some of the speculative Dollar-Yen longs.
Stronger Yen has weighed on the Nikkei as you said it’s down over two percent today. It’s quite a sharp move, but I wouldn’t like to extrapolate that to the broader region. It’s very much a Japan picture or Japan story unfolding there.
Q: We have a Bank of Japan (BoJ) meeting on January 22nd. In that do you think there is room for disappointment and the fact that the Yen has moved so sharply, people were calling for 90 in three months, it moved to near 90 in just about two or three weeks. Do you think that seems to be overdone and that could be a risk to equity markets in Asia or you won’t go so far?
A: Yes that is a fair comment. If you think about some of the speculation surrounding BoJ meetings now, ofcourse the new Prime Minister has made some quite forthright comments. Expectations have been built up. However, when I stand back and look at what the viable options are for the BoJ I don’t think there is anything particularly strident that they can do.
They have been sitting on ultra easy policy for couple of years now. The inflation target could be boosted to two percent, but they haven’t met the one percent target. So, a two percent target I don’t think will have too much significance in the near term. That is a fair comment indeed. Perhaps the market is a little bit too optimistic on options that could come out of that BoJ meeting.
Q: What is your sense of liquidity flows into emerging markets and emerging Asia? We had a very strong last quarter of calendar 2012. There is anecdotal information that January has been nothing like December or November, what is your own sense, will the flows continue?
A: I do see a supportive backdrop although there are some heightened uncertainties. They are having this US debt ceiling debate that is going to come up again in February. The way I look at the fourth quarter of last year the market evolved from focusing on Europe to focusing on the US fiscal cliff issue in my estimate in mid-November.
We are seeing half of the fiscal cliff determine the tax hikes that have come through. We saw markets rally in reaction to that. Now we have reprised. We are likely to move sideways as we look towards February. Whether there can be an agreement on the second trance of the fiscal cliff which is ofcourse pending on the spending side of the equation and indeed the debt ceiling. When push comes to shove I just don’t see that any US politicians or any big group of them have an incentive to really take this over the cliff. Unfortunately it’s just the reality that these things will always go down to the wire. Then indeed a satisfactory agreement will come out of it.
Q: Net-net flows you think will continue or it will be less effusive compared to the last quarter?
A: Last quarter was particularly strong reprising. Europe tensions would calm down. Then the market evolved and started focusing on the US and indeed that calmed down as well. So, they were both very positive events. I don’t see a similarly positive event panning out in the near term. My best case is that we move sideways in the next couple weeks. Ultimately the debt ceiling debate will be resolved. There is a bit of further impetus there for global markets. The global markets move tells something about the underlying health of financial institutions in general. About the broader liquidity picture that’s confronting developing economies.