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Global Top Cat

Japan 2014: Follow the Arrows to Japan’s Deliverance

By Yiannis G. Mostrous, on Dec. 31, 2013

With the Bank of Japan expected to expand its balance sheet by more than 30 percent next year, the probability that its quantitative easing program will expand to asset-backed securities and foreign bonds has also increased.

Accordingly, the Japanese yen should depreciate relative to the US dollar.

A weaker Japanese yen also benefits the country even more because the nation is one of the world’s largest net foreign creditors. Assets denominated in a foreign currency, account for 60 percent of Japan’s GDP, whereas liabilities are yen-denominated; a weaker domestic currency increases the value of these foreign assets in yen terms.

As we’ve seen in the US, the combination of an accommodative monetary policy and quantitative easing is bullish for equities.

If individual investors and pension funds see that the government’s efforts to stimulate inflation have worked, this development might prompt an influx of liquidity to the stock market.

At present, households in Japan have 56 percent of their financial assets in cash, while pension funds have allocated less than 10 percent of their portfolios to equities. There’s plenty of capital on the sidelines, as the majority of investors are still positioned for deflation.

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