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Current Views

April 11, 2013: Aggressive Policies Boost Japanese Stocks

Thoughts from Our Domestic Equity Team

Haruhiko Kuroda, the newly appointed Governor of the Bank of Japan (BOJ), made a strong initial impression on capital markets during his first policy meeting last week. Expectations were very high that the central bank would take bold steps under his leadership towards battling deflation, and he did not disappoint. He made explicit his goal of attaining a 2% inflation rate in approximately two years. In order to accomplish this, the Bank of Japan will dramatically expand both its purchases of government bonds as well the country’s monetary base. It will also ramp up its purchases of REITs and ETFs. Also noteworthy is that there was only one dissenter among the nine members of the Policy Board, indicating strong support for these far-reaching measures. Despite very high expectations leading up to this meeting, investors were clearly impressed as they drove the Japanese stock market up over 2% on the day.

Anticipation of extraordinary stimulative measures has already impacted the Japanese economy. The Yen has weakened materially against the dollar and other major currencies. This has been a boon for the country given that Japan is an export driven economy, and a weaker currency enhances the relative competitiveness of its products which are sold into international markets. Additionally, policy initiatives appear to be having a positive impact on the Japanese consumer. Purchases of discretionary goods have been picking up, and a recent measure of consumer sentiment reached its highest level since June of 2007.

We have held a constructive view on Japanese equities over the last few months. This was largely predicated on the incoming Abe administration and our belief that it would usher in a new era of more aggressive fiscal and monetary policies. The appointment of Kuroda to the highest post at the BOJ and the aggressive start to his tenure only serve to reinforce this viewpoint. Despite the significant run up in Japan’s Nikkei Index so far this year, we continue to believe that the market remains attractively valued, particularly in light of these most recent announcements.

Submitted by: Jason Sheer, CFA – Portfolio Manager



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