Ja­pan as a safe haven

Financial Mirror (Cyprus) - - FRONT PAGE - By Neil New­man

Global mar­kets are in a risk-off mood as in­vestors scram­ble to find a sure thing in an uncertain world. The pop­ulist surge in Europe and the US is end­ing long held “cer­tain­ties” about the de­vel­oped democ­ra­cies, while this week’s Brexit vote could set in train the Euro­pean Union’s break-up. Iron­i­cally, as in­vestors scram­ble for sta­ble ground, Ja­pan is prov­ing an is­land of calm, at least for those with an eye to cap­i­tal preser­va­tion. The yen has risen 6.5% against the US dol­lar in June and yields on 10-year govern­ment bonds have plunged to -16bp. It helps that re­fla­tion­ary poli­cies adopted by the Bank of Ja­pan have failed to stir mon­e­tary ve­loc­ity and with it price lev­els, so boost­ing yen­based risk-free as­sets.

Last Thurs­day saw the Bank of Ja­pan dis­ap­point eq­uity in­vestors by not boost­ing its as­set buy­ing pro­gramme and mak­ing no men­tion of he­li­copters be­ing revved up to drop money into govern­ment cof­fers. Such in­ac­tion will sup­port the yen as was the case un­til late-2012 when it be­came clear that Shinzo Abe would be prime min­is­ter and had a plan to adopt US road-tested re­fla­tion poli­cies.

A pre­ferred cur­rency trade in re­cent weeks has been short­ster­ling / long-yen which makes good sense when the po­lit­i­cal po­si­tion­ing of the two coun­tries is com­pared. While the UK works through its great ex­is­ten­tial drama and ag­o­nises about its place in the world, Ja­pan re­mains locked in a familiar po­lit­i­cal sta­sis which even in­volves an old-style po­lit­i­cal scan­dal based on the mis­use of po­lit­i­cal funds. Tokyo Gover­nor Yoichi Ma­su­zoe quit his post, set­ting up a gu­ber­na­to­rial elec­tion on July 31, which fol­lows a na­tional elec­tion for the leg­is­la­ture’s up­per house on July 10. As a re­sult, elec­tors will be served up a mix­ture of pork with new spend­ing to be de­liv­ered in a sup­ple­men­tary bud­get, and plow­shares in the shape of a for­eign pol­icy that does not an­tag­o­nise vot­ers with sabre-rat­tling moves to­ward remil­i­tari­sa­tion.

Prime Min­is­ter Shinzo Abe has emerged from re­cent po­lit­i­cal shenani­gans more pop­u­lar and strength­ened. He has moved against phi­lan­der­ing male cab­i­net min­is­ters who have courted op­pro­brium among fe­male vot­ers and it is noteworthy that four of the can­di­dates for the Tokyo gover­nor role are women. With the Lib­eral Demo­cratic Party fac­ing no se­ri­ous op­po­si­tion, Ja­pan in­creas­ingly looks like a sol­vent and sta­ble bet, even if it re­mains mired in de­fla­tion and slug­gish growth.

None of this quite fits with the stan­dard bum­bling nar­ra­tive that most for­eign com­men­ta­tors have for Ja­pan. As I see things, Abe’s re­fla­tion­ary poli­cies have had tan­gi­ble re­sults in that the na­tional mood has been shifted from mis­ery to some­thing ap­proach­ing a can-do spirit with re­sults seen in the sharp pick-up in em­ploy­ment of “lost gen­er­a­tion” work­ers. Yet it re­mains an in­du­bi­ta­ble fact that Ja­pan re­mains stuck in its de­fla­tion­ary trap and the propen­sity of the pop­u­la­tion to splurge or even take risk has barely been budged by hugely ex­pan­sion­ary mon­e­tary pol­icy.

The Ja­panese mind­set has been shaped by 20 years of grind­ing eco­nomic dis­ap­point­ment and BoJ pol­icy has sin­gu­larly failed to change that. Mi­cro-sav­ing and fru­gal liv­ing has be­come a fash­ion, es­pe­cially among young peo­ple. Although work­ers re­ceived juicy bonuses af­ter the 2014-15 pop in cor­po­rate prof­its that fol­lowed the yen’s more than - 50% de­val­u­a­tion, wages are not ris­ing and so the re­flex­ive re­sponse (en­tirely in ac­cor­dance with Mil­ton Fried­man’s per­ma­nent in­come hy­poth­e­sis) has been to save.

To be sure, next week Bri­tons may stick to type and con­ser­va­tively vote to stay in the EU, caus­ing in­vestors to fo­cus more on Europe’s cycli­cal re­cov­ery rather than forces of dis­in­te­gra­tion. In that even­tu­al­ity the gen­eral cli­mate will likely shift to­ward risk-on and cur­rent ex­treme in­vestor po­si­tion­ing means the yen will likely re­trace gains and JGB yields could move higher in a whiplash move­ment.

Still, our broader point is that so long as the de­vel­oped world re­mains racked by po­lit­i­cal un­cer­tainty, a steady-asshe-goes Ja­pan will likely re­vert to its more familiar role of be­ing a low-growth shock ab­sorber, with the yen of­fer­ing a

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