In case you’ve missed it, the Nikkei has been on a tear this year.
Here’s a 6-month look at the index from Bloomberg:
Now granted, lots of markets are booming this year, so what’s special about the Nikkei’s rise?
Well, two points on that. The first is that Japan has been a long-time laggard, so the rest of the world doing fine has never been a guarantee that Japan would.
And what’s catching people’s eye is not merely the Nikkei, but the actions of the BOJ and the yen.
See, for the first time in ages, the BoJ actually seems to want to create some inflation, a much derided phenomenon that the country could desperately need. The knock on Japan, is that the society is dominated by the aged, who have enough political clout to oppose any attempts at inflation, and the eating away of their fixed income investments.
But recently, the BoJ actually said it was pursuing an inflation target.
And not only that, the yen — which has been incredibly strong for decades — is actually weakening with some pace.
Here again, from Bloomberg, is a look at the dollar vs. yen going back 6 months. As they say: Now that’s a knife.
So we’re hearing more and more about how it might be different this time in Japan, and the economy could come rumbling back to life.
And the latest bull case on Japan comes from, of all places, AEI, where John H. Makin asks: Is Japan Set To Boom?
In addition to discussing the above, Makin does a great job of clearing up one common worry, which is that a rise in interest rates would cause a rise in interest rates threatening the countries famously stretched government budget.
Fortunately, two other important changes would accompany higher inflation expectations that would help to mitigate the burden of an eventual rise in interest rates. First, the desire to hold cash and low-yielding debt would drop and lenders would spend more, especially on durable goods for which they expect prices to rise. Investors would sell cash and low-yielding bonds in exchange for stocks as they begin to expect higher dividends from companies prospering in a faster-growing economy with more consumption spending and exports. Second, faster growth would generate more tax revenues, helping defray the government’s higher borrowing costs.
This all amounts to saying that the eventual normalization of interest rates to, for example, 3 per cent on 10-year government bonds indicates a broader normalization in the Japanese economy that includes stable prices, higher growth and employment, and an end to chronic overvaluation of the yen. All major industrial economies go through this process after a financial crisis; it just does not usually get delayed for 20 years, during which stagnation prevails. But Japan’s politicians are an unusually ineffective lot, and the BOJ has been hampered by an almost obsessive fear of inflation that has led it to tolerate deflation for far too long.
So despite the countrys’ massive debt-to-GDP, it needn’t fear a rise in rates. The bigger fear, really, is that the BoJ loses its nerve, or only goes part way. Still, interesting that people are even talking about this.
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