Japan needs both fiscal, monetary stimuli to boost economy: JPM

Latha: This is a long awaited manna from Shinzo Abe. 27 trillion will whet the market's appetite enough. You see the market running?

A: I do think it was in line, pretty much what the market expected. I do think that this should help things hopefully in conjunction of what the Bank of Japan (BoJ) should be announcing later this week. We do know that Kuroda (Haruhiko Kuroda, Governor of the Bank of Japan) does like to surprise the market. We will be waiting along with the rest of the market to see what they come up with. It is a hope that they will come up with either something unconventional or an expansion to what they currently doing now, to hopefully turnaround what is happening in Japan but I do think that's in conjunction with what the Abe government has just released that it should be good news for Japan. However, it does quite depend on what the BoJ would do when we get news on Friday. Sonia: So, until we get the news on Friday how do you see the markets react, do you think this stimulus of 27 trillion Yen is enough to help the Japanese economy recover because we have seen a big decline in a lot of internals. For example the machinery orders have declined significantly over there. Do you think this stimulus is enough for recovery? A: I actually think that it might not be enough just by itself. Market expectations were for around 20 or possibly 30 trillion. He has met that expectation. I also think the worry here is that even with this 27 trillion yen fiscal package we will see immediate effects on gross domestic product (GDP) growth for Japan. A lot of this will have some longer term effects that won't be immediately effective on the Japanese economy. So, there is that concern that it won't see an immediate turnaround in Japan's economic fortunes. Latha: If indeed there is this 27 trillion package, and I don't know what you are expecting from Haruhiko Kuroda, if you can tell us what Bank of Japan (BoJ) may do in terms of easing. Together will that actually pull money out of EMs like India? A: Your worries here is that there is a possibility that developed markets might overshadow emerging markets if we see what is happening in Japan. Pull money out of emerging markets, I don't think that should be a huge risk. Emerging market are seen a bit more favourable in our current conditions. They have done quite poorly over the last few years and we have some better news recently out of China. With China stabilising I think it should mean that emerging markets will also see a continuation of more inflows. If we see a look at the breakdown of the inflows that are coming into India the foreign institutional inflows are still generally positive. People are still fairly positive on the emerging market story. They are a bit insulated from the worries of what is happening in Europe and as I mentioned with China stabilising it should mean some good news. With what is happening in Japan I don't think it will pull that much attention away from the emerging markets as I mentioned. A lot will hinge on what the BoJ will do. They still might disappoint the markets. We think that there have been an expansion in all freedom engines of expansion monetary base expansion over negative interest rate policy and expansion in the asset purchasing program whether that will be enough to really turn the market sentiment around on Japan will remain to be seen but I still think there are positives on emerging markets right now. Sonia: In a few hours from now we will get to know more details on what this stimulus package entails from Shinzo Abe. He is hot on the heels of his election victory. So, you can expect perhaps more money from the Prime Minister there. But in a few hours from now we will also know what is on the mind of the FOMC. What are your thoughts, do you think we could get any indications of whether there is a rate hike coming in the September policy because in this policy the consensus is there won't be any move. What are your thoughts? A: I do think that hopefully the fed will give us an idea of what is happening in September. A rate hike in July is totally off the table. Nobody expects the fed to make a move this week especially with the fed's desire to remain fairly transparent on how they are doing. September is still an outside chance. There is still a possibility but I do think for that to happen the US economy will have to do fantastically for the Fed reserve to be comfortable with a rate hike. Here at JP Morgan Asset Management we are still saying that it is going to be two rate hikes at maximum, if that is going to be the case. It will have to be a September and a December rate hike but as I mentioned the September rate hike is looking questionable right now. We are still thinking it is going to be December but hopefully the US numbers do turn out very well to make a move in September but it will really have to depend on the numbers being released doing very well for US if we can expect a September move.