The danger of clinging to the easy-money safety blanket
JO KAWAKAMI, Nikkei staff writer
TOKYO -- The Nikkei Stock Average may have started off the week on a bad foot, but many market watchers seem unperturbed. Their confidence stems from the expectation that the industrialized world's blend of economic growth and supportive monetary policy will remain "just right."
Monday's sell-off was widely seen as within the bounds of normal profit-taking. The index had climbed about 6% from its near-term low in March through last Friday.
The macroeconomic picture isn't bad. U.S. nonfarm payrolls for March were in line with market estimates, and figures for January and February got an upward revision, attesting to the hardiness of the American economy. While the labor market may be improving, the Federal Reserve "need not be in a hurry to tighten policy," reckons Michael Feroli, an economist at JPMorgan Chase.
Indeed, Fed Chair Janet Yellen lately seems to be trying to tamp down speculation that she is eager to raise interest rates -- speculation she encouraged by hinting in mid-March that a hike could come next spring. About 10 days after that remark, widely seen as a slip of the tongue, she said she had "no doubt that the economy and the job market are not back to normal health."
All this suggests the U.S. is in a "Goldilocks economy" where growth and excess liquidity can coexist. Many investors see reason to hope for rising share prices.
Europe and Japan are in similar situations. Barclays reckons that the door is open to additional easing by the European Central Bank following last month's drop in eurozone inflation. Although the Bank of Japan now looks unlikely to deploy fresh easing this week, many still think it will do so in July, given the fear that the April 1 consumption tax hike will depress growth.
Easy money may be keeping equities afloat, but two icebergs lie ahead. The first is corporate earnings. Japanese companies' forecasts for the year through next March are bound to be conservative, says Masatoshi Kikuchi at Mizuho Securities. To avoid upsetting the market, earnings will need to be middling enough to guarantee continued monetary easing -- no easy proposition.
The second is Fed policy. Once quantitative easing ends, possibly this fall, attention will turn to the timing of the exit from near-zero interest rates. There is no certainty that Yellen can communicate this shift to the markets effectively.
In the Tokyo market, real estate stocks are mirroring the precarious balance of growth and easing. The Nikkei real estate sector index tumbled 3% Monday after climbing for eight straight sessions. Industries that benefit from excess liquidity are prone to the vagaries of speculation over monetary policy.
In the story of Goldilocks, the bears eventually come back and catch the little porridge-pincher napping. Investors, too, need the good judgement to know when the party is over.