Japan made policy announcements last Friday that were highly supportive of overweight analyst calls for Japan. On inflation, the Bank of Japan and Prime Minister Shinzo Abe are willing to ride out the political backlash against quantitative easing and stick to a 2% inflation target.
Considering net foreign assets are 60% of Japan’s gross domestic product, Credit Suisse believes that inflation is the only constraint on policy flexibility. This should reinforce the rising inflation expectations, which in turn should reduce savings ratios, help growth and encourage institutions and retail to seek inflation hedges. As a result Credit Suisse increased its 2014 year-end Nikkei target to 17,500 from 17,000 but kept its 2015 target at 19,000.
The Government Pension Investment Fund (GPIF) near doubling of equity weightings could lead to $90 billion of domestic equity buying in Japan. The GPIF has focused on passively following the Nikkei 400, which has membership criteria that incentivizes Japanese companies to improve both their return on equity and corporate governance.
Credit Suisse lists a few other reasons to remain overweight in Japan:
- It has the strongest earnings revisions, even prior to yen weakening, showing the benefit of cost cutting.
- Some 53% of retail financial assets are in cash, which may be subject to change.
- Japanese equities trade on a 17% price-to-earnings discount to the United States.
- Rising residential and commercial property prices.
One outstanding prediction that Andrew Garthwaite, Credit Suisse analyst, is making is that over the next 12 months G4 central bank balance sheets will expand by more than twice the pace they have over the past year. Central banks respond to disinflationary threats by printing money, and gold appears to no longer be an inflation hedge. As a result, Credit Suisse remains overweight in Japanese equity.
Japan is becoming more of a competitive threat as corporates have been less sensitive to a weaker yen because they are pricing in dollars rather than yen.
Some exchange traded funds that can allow U.S. investors to take advantage of this market are WisdomTree Japan Hedged Equity ETF (NYSEMKT: DXJ), which we have previously discussed in depth, and iShares MSCI Japan (NYSEMKT: EWJ).
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