The BoJ’s Chief Economist argues that imputed rent artificially depresses inflation because it does not take account of the deprecating value of housing costs over time. Other developed economies make similar adjustments to their consumer price measures, including the US.
Arguably, the change in calculation methodology is likely to make the 2% inflation target more achievable. As a consequence, expectations of further BoJ stimulus this year have been substantially reduced.
With additional BoJ stimulus unlikely in the foreseeable future, we believe that the trend of yen weakness, which has been closely aligned to the central bank’s quantitative and qualitative easing policies, has run its course in the near term. We have held an overweight Japanese equity exposure since late last year on a 50/50 currency hedged basis. Given our reduced expectations for further BoJ stimulus coupled with our view that the yen offers defensive characteristics in the event of a pick-up in general market volatility, we have decided to remove that hedge.
Notwithstanding our more cautious outlook on the yen, we remain optimistic on the domestic Japanese equity story. Corporate developments are favouring a more shareholder-friendly focus, while Prime Minister Abe, whose approval ratings have been suffering in the polls recently, remains keen to align the success of his premiership with the stock market’s performance.