Jackson Hole symposium failed to dispel fears of rising interest rates

Although Nvidia’s spectacular quarterly earnings briefly helped to push stocks higher led by technology shares, the rally quickly fizzled out as investors remained concerned about the prospects of interest rates remaining higher for longer ahead of comments from US and European monetary policy makers gathered in Jackson Hole for the economic symposium. Indeed, cautionary comments from the officialdom that inflationary pressures remain problematic came in line with such expectations. 

Once again, the outlier seemed to be the BOJ whose policy makers remained adamant about the central bank’s outlook for falling cost pressures in Japan which they argued justified the ultra-loose policy stance. As a result, the dollar strengthened against the yen once again to above 146 level and look set to march towards 150 which it tested last year when we saw currency interventions ordered by MOF to try to halt the yen from plunging further. 

However, there is a growing consensus among currency traders that as long as BOJ leaves its interest rate policies unchanged, interventions will prove futile and the yen is likely to continue to weaken, hurting the nation’s purchasing power and exerting upward pressure on imported prices. As we have noted again in the past few weeks, we view BOJ’s policies of suppressing long bond yields as a major error that will not only further hurt the Japanese currency but ultimately its yield curve control through aggressive sovereign bond purchases will prove unsustainable as a result. 

Interestingly, Tokyo’s headline inflation gauge for August released last Friday which came below 3% for the first time in almost a year failed to have much of an impact on rising JGB yields as core inflation remained around 4% and rising prices are seemingly spilling over to the service sector. We feel that most market participants realise by now that without government’s big household subsidies, inflation rate would be well above 3% and rising issuance of bonds to finance the nation’s growing budget deficit would lead to climbing rates anyway.

Moving on, Japan’s decision to start discharging the stored water from its crippled nuclear power plant into the Pacific has sparked much outrage, mainly from China which immediately banned imports of Japanese sea food products. The negative sentiment also threatened to spill over into boycotting other Japanese consumer goods. To be sure, we have seen such reactionary measures by Chinese consumers before and beyond Japan’s sea food industry which looks highly vulnerable to China’s import ban, we don’t see any possible boycotts lasting very long or proving impactful. 

The key question remains whether Japan’s stock market rally will resume, supported by improving shareholder returns and corporate restructuring or will weaker volume demand for Japanese exports which has been the key engine for economic growth falter? With Chinese economy clearly on a downward spiral and interest rates looking to remain elevated in the West, we remain highly cautious of consensus bull market scenarios regarding the Japanese equity market as we approach the second half of this fiscal year.