25 Jun 2014
Japan: Updated growth strategy finalized - Nomura
FXStreet (Bali) - Yujiro Goto, FX Strategist at Nomura, reviews the updated growth strategy in Japan, noting that these reforms will limit USD/JPY downside risks, while at the same time, it will remain important topics in the market in the second half of this year, Yujiro said.
Key Quotes
"The Japanese cabinet approved its updated growth strategy, and Prime Minister Abe had a press conference after the cabinet meeting Tuesday. Corporate tax and public pension fund reforms are the two policy areas which have been focused on in the FX market and these policies did not change from the final draft released last week."
"In terms of corporate tax reform, the government aims to lower corporate tax rate to below 30% over the next few years, and it commits to start the cuts in the next fiscal year. The growth strategy says that the GPIF's asset allocation should be reviewed appropriately to ensure the sustainable pension finance under the changes in economic and market environment as quickly as possible."
"As the expression on corporate tax reform remains vague, there is still room for corporate tax reform discussion to influence Japanese equities and the USDJPY into the second half of this year. The magnitude of the corporate tax cuts and extra funding sources for the tax cuts will be discussed by end-year, when Prime Minister Abe also makes the final decision on the second consumption tax hike. He said, during his press conference, that the decisions on corporate tax cuts and consumption tax hike are completely irrelevant. However, fiscal hawks may need to reach a compromise for aggressive corporate tax cuts and thereby enable a consumption tax hike by year end. Thus, corporate tax reform discussion is likely to be more positive for Japanese equities and USDJPY than negative."
"The growth strategy says that GPIF’s review of its asset allocation should be done as quickly as possible, as already stated in the final draft. The head of GPIF investment committee, Yonezawa, said that the fund may announce its new target portfolio in August, if the government asks it to do so early this month. Thus, a new target GPIF portfolio may be announced in two months at the earliest, with around 40% domestic bonds, 20% lower than the current share. As the timing of GPIF target portfolio change nears, we think smaller pension funds' investment behaviour may have been already changing, based on various flow data."
"Trust banks, which are proxy of pension fund money, sold JGBs in May for the first time in 19 months while purchasing domestic bonds at the highest pace since March 2009. They also bought foreign equities and bonds in May. The portfolio shift of pension funds will support USDJPY going forward."
"Even though the final version of the growth strategy did not influence the USDJPY much, as there were no changes in corporate tax and GPIF reforms, we expect these reforms to remain important topics in the market in the second half of this year. Downside risks for the USDJPY remain limited, in our view, partly owing to these
reforms, and positive momentum in the US data and yields will weaken the JPY against USD gradually. Thus, we continue to recommend trading the JPY from short side, even after the growth strategy update today."
Key Quotes
"The Japanese cabinet approved its updated growth strategy, and Prime Minister Abe had a press conference after the cabinet meeting Tuesday. Corporate tax and public pension fund reforms are the two policy areas which have been focused on in the FX market and these policies did not change from the final draft released last week."
"In terms of corporate tax reform, the government aims to lower corporate tax rate to below 30% over the next few years, and it commits to start the cuts in the next fiscal year. The growth strategy says that the GPIF's asset allocation should be reviewed appropriately to ensure the sustainable pension finance under the changes in economic and market environment as quickly as possible."
"As the expression on corporate tax reform remains vague, there is still room for corporate tax reform discussion to influence Japanese equities and the USDJPY into the second half of this year. The magnitude of the corporate tax cuts and extra funding sources for the tax cuts will be discussed by end-year, when Prime Minister Abe also makes the final decision on the second consumption tax hike. He said, during his press conference, that the decisions on corporate tax cuts and consumption tax hike are completely irrelevant. However, fiscal hawks may need to reach a compromise for aggressive corporate tax cuts and thereby enable a consumption tax hike by year end. Thus, corporate tax reform discussion is likely to be more positive for Japanese equities and USDJPY than negative."
"The growth strategy says that GPIF’s review of its asset allocation should be done as quickly as possible, as already stated in the final draft. The head of GPIF investment committee, Yonezawa, said that the fund may announce its new target portfolio in August, if the government asks it to do so early this month. Thus, a new target GPIF portfolio may be announced in two months at the earliest, with around 40% domestic bonds, 20% lower than the current share. As the timing of GPIF target portfolio change nears, we think smaller pension funds' investment behaviour may have been already changing, based on various flow data."
"Trust banks, which are proxy of pension fund money, sold JGBs in May for the first time in 19 months while purchasing domestic bonds at the highest pace since March 2009. They also bought foreign equities and bonds in May. The portfolio shift of pension funds will support USDJPY going forward."
"Even though the final version of the growth strategy did not influence the USDJPY much, as there were no changes in corporate tax and GPIF reforms, we expect these reforms to remain important topics in the market in the second half of this year. Downside risks for the USDJPY remain limited, in our view, partly owing to these
reforms, and positive momentum in the US data and yields will weaken the JPY against USD gradually. Thus, we continue to recommend trading the JPY from short side, even after the growth strategy update today."