Away from the noise of economic data and quarterly earnings an interesting situation has been developing in the Japanese bond market. Following the seismic changes instigated by Abe-san over a year and a half ago, Japan has been running a negative real interest rate as defined by the 10 year government bond yield less inflation, even when adjusting for the recent rise in Japanese VAT.
The two other occasions in recent history when real yields were negative were the Asian financial crisis in 1997 and the oil price spike in 2008 (see chart below). While these two events were caused by external developments, this is the first time in decades that Japan has engineered negative real interest rates largely of its own accord. Loose monetary policy, a weak currency and economic momentum have all contributed to an inflationary backdrop. However, bond yields have remained resolutely supressed despite this development, instead being influenced by the low yield trend in bond markets elsewhere.
Having negative real rates is relatively unique for a major economy and provides investors in Japan, who have stockpiled cash for many years, with an incentive to switch into alternative investments such as real estate or equities. While there has been no torrent of investment into equities as yet there remains the possibility, if not the probability, that some such move will take place. Such a shift would not only be welcome to stock market enthusiasts, but could have a beneficial impact on economic activity. At Henderson our funds are currently biased towards the domestic sector of the market, which should be the prime beneficiary of such an outcome.
Michael Wood-Martin, Henderson Global Investors
These are fund manager views at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser.
