In fixed income we have highlighted to investors to anticipate negative returns with government bond investments.
We continue to favor Japanese REITs, which benefit from asset purchases by the Bank of Japan (BoJ) and the Japanese pension fund, GPIF. The yield spread to government bonds is still appealing, and we expect further inflows into real estate investment markets given this yield advantage.
On the monetary policy front, we expect additional policy easing to occur most likely by the July BoJ meeting, with risks of a surprise move earlier (potentially even in April).
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The form of easing will likely be through an increase in the pace of purchases in its 80 trillion yen in annual bond purchases by around 5-10 trillion yen.
The BoJ's aggressive asset purchase program has led to a decline in real bond yields – for the first time in many years. Our 2015 gross domestic product growth forecast is 0.6 percent and our CPI inflation forecast is 0.9 percent. We expect growth and inflation to accelerate into 2016.
While the overall pace of economic activity should have been at a more advanced and stronger pace currently, we do note that the momentum of net exports is improving. The income effects from rising exports have yet to feed thru to consumer spending. We await further data points to observe how these dynamics also translate into the outlook for investment spending.
The postponement of the second consumption tax hike from October 2015 to April 2017 has shifted the burden of the impact to a later date, thus having substantially improved the outlook for 2016. However, we remain skeptical that bold structural reforms will be announced, and expect Japan's long-term growth to be subdued due to unfavorable demographics.
We do not expect inflation to return to the BoJ's 2 percent target anytime soon. The BoJ will therefore likely have to keep monetary policy loose for an extended period of time. The delay of the second consumption tax hike delays fiscal consolidation and keeps the debt burden and fiscal deficit high.
Sailesh K. Jha is a Director and the Chief Asia Economist for Private Banking and Wealth Management, based in Singapore. Mr. Jha has 20 years of economic research and macro strategy experience. He was the Senior Regional Economist for Credit Suisse's Investment Banking Research between 2004 and 2007, and has served a number of global and regional investment banks. He was Managing Director of Fixed Income Sales at Jefferies Singapore, Senior Regional Economist with Barclays Capital and Senior Regional Economist at DBS Bank. Most recently, Mr. Jha served as a senior advisor on global macro and financial market strategy at an Asian family office.