The Bank of Japan's strategy of purchasing domestic equities could create a fiscal crisis if interest rates spike, warns BlackRock.
BlackRock's 2015 investment outlook Dealing with divergence has raised concerns about the BOJ’s bullish stance on Japanese equities in an effort to 'jumpstart' the economy.
Claiming that the BOJ is “playing with fire” with its method of buying domestic equities, BlackRock said this has become the norm for the nation’s central bank in the last two years.
With the BOJ pushing to create a stronger "equity culture" to reduce the country’s vulnerability to the "mood swings" of global investors, BlackRock questioned what would happen if inflation spiked faster than anticipated.
“The nightmare scenario would be a spike in [Japanese government bonds] JGB rates leading to a fiscal crisis,” the report said. “Japan’s public debt load stands at almost 250 per cent of GDP, according to the IMF, the highest in the G7.”
BlackRock also highlighted the biggest near-term risk for Japan is a loss of momentum for Prime Minister Shinzo Abe’s ‘Abenomics’ plan to revitalise the economy and drag it out of a two-decade economic “funk”.
“Abenomics could give way to ‘Kurodanomics’ – with BOJ governor Kuroda pressing harder and harder on the monetary accelerator, but structural reforms going nowhere,” the report said.
“[The Prime Minister] has called a snap election and delayed a sales tax rise. The size of his parliamentary majority will affect his ability to deliver his ‘third arrow’ structural reforms detailed in Rising Sun, Setting Sun of March 2014,” it said.
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