Japan GDP growth downgrade won't hurt global mood much: Manulife

Japanese central bank, the Bank of Japan Thursday kept reserves deposit rates unchanged, but trimmed real GDP growth forecast for FY17 to 1.2 percent from 1.5 percent earlier. The real GDP growth forecast for FY18 has been cut to 0.1 percent from 0.3 percent earlier.Geoff Lewis, Senior Strategist, Manulife Asset Management, tells CNBC-TV18, there could be a knee-jerk reaction in global markets to the GDP growth downgrade.However, the impact is likely to be limited because Japan has not contributed to the global economy for some time now.Lewis says the relative weakening of the dollar should limit downside in emerging markets.Below is the transcript of Geoff Lewis’ interview with Latha Venkatesh and Sonia Shenoy no CNBC-TV18.Sonia: The Nikkei Futures have tumbled almost 5 percent now after the Bank of Japan kept the policy steady but indicated that the growth forecasts have been slashed down for next year for Japan. How would you read into that?A: This is disappointing to markets because the general assumption was that the Bank of Japan would need to do something that it would come out with some further instrument from its armoury, that it would buy exchange traded funds (ETF) or something like that. Clearly, there has been a disappointment. There was a disappointment much earlier in the year when the markets did not really accept the idea of negative interest rates.So, the Bank of Japan now is realising perhaps that there are not so many bullets left in the gun and this is a stage which we are going to see increasingly in 2016. You cannot just leave it to monetary policy to get us out of this slow growth mode. We need to see more coordinated policy action and that is what we failed to get at G20, either in Washington or the Shanghai meeting.Latha: We are probably not getting that impact on the Nikkei just yet because of the lunch break on the Nikkei index, but do you think we are going to see some big selling? Now the Hang Seng has also moved into the red. Other indices have begun to move. Are we going to see some very big emerging market cuts because of the way in which the Bank of Japan statements has been received? We can see that the dollar-yen is clearly two percent lower. It has now gone to 109 per dollar. The yen has strengthened considerably by 2 percent.A: Yes, everything seems to be going to wrong way for Japan right now, particularly the currency and the stock market. And the buying that we have seen, the Bank of Japan is now a major shareholder in a large number of companies via its ETF purchases that has no noticeable effect whilst most markets in local currency terms since the end of January, over the last three months are up about 10 percent and the emerging markets up 13 percent.In local currencies, Tokyo price index (TOPIX) is down one percent. So, there is not a lot that seems to be going right for Japan just now. By recognising that the economic outlook has deteriorated, the BoJ was just coming into line with private sector forecasters. But while that might be a knee-jerk reaction in other markets, it will not generalise.Latha: Do you expect that because the dollar has weakened, the impact on other emerging markets will be limited?A: I think it will be limited. You might see some knee-jerk reaction, but Japan’s economic problems are in a class of their own and Japan has not contributed anything much to global growth over the last couple of years. So, from that point of view, the implications for other emerging markets are very limited indeed. Much more important for them are the signs that growth is picking up a little bit in China or at least China has managed to stabilise its economic growth rate around 6.75 percent.Sonia: In fact, we have generally seen China have a bigger impact on the Indian markets than Japan. So investors sitting in India should not be too worried about the data that we are seeing on the screen, right – the red on the Japanese markets?A: That is correct. If there is a dip then I would see that as a buy in opportunity. We are seeing foreign funds coming back to India. The last number I have, early April, buying was USD 1.3 billion positive, year-to-date with particularly large inflow of over USD 3 billion in March. Smaller inflows in April, but nevertheless, foreign investors are still looking to India as being one of the favoured destinations for emerging market equities in the second quarter.