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Japan’s yen has been sinking, and its stock market has been surging ever since late last year when Japan established its intentions to pursue easy monetary policy to stimulate its economy.However, it’s interesting to note that these massive market moves are occuring even though Japan has yet to implement a single new policy.
On January 21, the Bank of Japan announced it would pursue a massive asset purchase plan in its efforts to stimulate the economy. But those programs aren’t expected to start until 2014.
This has everyone asking: Is all of the news priced into the markets?
Nomura’s Richard Koo notes that this was the case in the past for Japan. But this time could be different. From his latest note (emphasis ours):
An old market adage advises investors to “buy on the rumour and sell on the fact.” That exchange rates and stocks have moved this far without a single policy being implemented suggests this was a case of “buy on the rumour.”
The question now is whether investors will sell on the fact. I suspect they are wondering about the advisability of betting on the BOJ’s reflationary policies at a time of zero private demand for funds.
Investors have often bought stocks and sold the yen on BOJ easing, but these were almost always cases of buying on the rumour and did not last for long.
This time, however, the government is preparing two more initiatives to strike at the heart of the problems facing Japan’s economy. If they constitute a meaningful policy response, I think it is conceivable that investors would buy on the fact as well.
It is therefore critical for the future of Japan and its economy that the government unveil the second and third pillars of its plan as soon as possible, and that they contain truly substantive measures.
Buy on rumour, buy on fact? We’ll find out soon enough.
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