In April, the performance of exchange-traded products (ETPs) tracking Japanese equities put them atop the league table in the European ETP universe. Over the course of the month, Japanese equity ETFs surged 12-13% depending on their underlying benchmark. Much of the enthusiasm for Japanese equities has stemmed from Japan’s uber-loose monetary stance which has been referred to as ‘Abenomics’ in the popular press—a play on the name of Japan’s newly elected Prime Minister, Shinzo Abe. Mr Abe has advocated an economic platform characterised by aggressive monetary and fiscal stimulus, set an inflation target of 2%, is targeting depreciation of the yen and is looking to implement structural reforms designed to breathe life into Japan’s stagnant economy.
Despite having applied massive amounts of fiscal and monetary stimulus, Japan continues to trudge along a difficult road towards economic well-being. Over the past two decades, Japan's gross public debt has skyrocketed to a level representing more than 200% of GDP. With 20% of the country’s population over the age of 65, Japan's social security spending has been a significant contributor to this deficit, but persistent weak economic growth has also served to reduce tax revenues as a percentage of GDP. Tax receipts have recently reached levels last seen in the mid-1980s.
Energy prices remain a chief concern in Japan. Currently, Japan's energy costs are 40% higher than the US and nearly 2.5 times higher than South Korea due to a dearth of domestic energy sources. The post-tsunami nuclear disaster contributed to the most recent escalation in domestic energy prices. Furthermore, as international pressure mounted on Iran, Japan began to limit its imports of Iranian oil, which had previously accounted for 10% of its total oil consumption. Last year, Japan slashed its Iranian oil imports by nearly 80% to comply with Western sanctions and more cuts are scheduled for the coming months.
Arguably, the most significant issue affecting Japanese corporations in the past decade has been the appreciation of the yen. Over the past ten years, the Japanese yen has appreciated 2.35% on an annualised basis against the US dollar. For Japan's large-cap exporters, the yen’s rise has been a nightmare, weighing on their ability to remain competitive abroad. In an attempt to address this problem, the Bank of Japan (BOJ) has maintained an ultra-easy monetary policy stance with its benchmark overnight target rate set to 0.1%. Moreover, under BOJ Governor Haruhiko Kuroda, the BOJ plans to purchase 7.5 trillion yen worth of bonds each month and double the monetary base within the next two years. Thus far, these policies appear to be working as the yen has fallen 17.3% relative to the US dollar in the past six months.
On the other end of the performance spectrum, exchange-traded products in Europe tracking silver lost between 15-17% in April. This steep decline is likely due to the continued equity rally and muted inflation concerns—factors which have also been weighing on the price of gold of late. When inflation rises and/or the equity market loses steam, the demand for silver (and gold) often increases as investors seek a safe haven to park their assets. Indeed, historically silver and other precious metals have exhibited low to negative correlations to equity and fixed income securities and proved to be a dynamic inflation hedge. In addition to investment uses, silver also has broad array of industrial applications. According to the Gold Fields Mineral Services, industrial applications for silver have accounted for roughly 55% of the total silver demand in recent years. Therefore, while recent movements in the price of silver may be related to more mild inflation expectations, don’t expect the price of silver to be determined solely by movements in the global economy and investor risk appetites.
