Japan's economy is too fragile to withstand interest rate rises in the near future, according to Sch...
Japan's economy is too fragile to withstand interest rate rises in the near future, according to Schroders and Abbey National Asset Management.
The vast bulk of Japanese wealth is still tied to land, which is going down in value, the country is wracked by doubts over the speed of corporate restructuring and retail sales figures are still falling year-on-year.
Rob Carnell, Asia economist at Schroders, says consumption figures in the country are not great but there are signs the decline is bottoming out.
He adds he is pleased the Bank of Japan (BoJ) left rates unchanged although he is fairly certain they will go up in September once the second series of GDP data for the country is known.
Carnell believes raising rates would be the wrong thing for the BoJ to do as Japan totters towards economic recovery, a view echoed by Fraser Laird, head of Japanese equities at Abbey National Asset Management.
Laird says the BoJ has spent the last few months priming the market for an interest rate rise and the outpouring of international opinion added to negative noises made by domestic economists has only delayed the BoJ's determination to raise rates.
Carnell says the reasons cited by the BoJ for raising rates from 0% include the belief that the the emergency rate is leading to market distortion plus the idea that it will provide greater flexibility with future monetary policy going forward.
This distortion comes in the form of poorly run companies allowed to stay in business as money is so cheap, while savings rates for the general public are poor. However, Carnell argues these reasons are not strong enough given the factors that indicate a rate rise now would be poorly timed.
He says: "Bankruptcy is rising 20% year-on-year and the only flexibility a rate rise now will give the BoJ is to go back to 0% at a later date."
Heavily indebted firms, such as those in real estate, agriculture and construction, would be worst hit by the rise as would manufacturing. However, Carnell points out that Japan's manufacturing sector has actually been doing quite well. The service sector has largely been operating in a profitless environment, according to Carnell, who says that raising the interest by even 25 basis points will signal the end for many companies.
Laird says a number of economic strategists are worried that Japan's fragile economy will slow and many firms will file for bankruptcy if interest rates are put up.
He adds: "Old Japan sectors are still heavily debt-laden and many are effectively being supported by the 0% interest rate.
"Add to that the possibility of the yen strengthening as a result of the rate rise, combined with the US economy slowing, and you have to question if the Japanese economy will be able to progress."
Laird feels a delay of six months by the BoJ would see the economy in a stronger position. He is overweight consumer finance companies, which he feels have relatively cheap valuations and show decent growth rates. He is also overweight major electronic companies despite being watchful of the US effects on the sector.
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