Feb 15, 2012

BOJ Inflation Targeting Spurs Japan Outperformance

Japan's economy has been mired in deflation for the most part of 2 decades. Consequently capital stays idle in zero-yielding bank accounts (where it is duly recycled into purchases of government bonds) rather than invested in a productive way. This is all likely to change with the Bank of Japan yesterday finally announcing a specific inflation target. The combined savings of all the people in Japan amount to a massive amount of financial capital. If inflation does pick up, and people wake up to the need to look for meaningful ways to invest it, this can really jump-start the economy and propel the Nikkei to ever higher levels. (Especially if you
add the positive impact of a weaker yen.)

Today the market has started to price this in, with the Nikkei leading gains in Asia with a large outperformance against other indices. Judging by the one day delay and the character of the buying this is most likely overseas real money allocation (combined with a healthy dose of short-covering as we broke the most recent Oct high). What we suggested in What if 2012 is the Year of the Samurai? may in fact be starting to play out.

(For more WhatIf posts click here)

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