Sasaki believes that the impact of an end to deflation on corporate earnings could be profound. He points to companies such as Yakult, which have been able to raise prices for the first time in 22 years. Companies that have pricing power can exercise it for the first time in two decades.
Equally, it is likely to change the structure of household financial assets, said Sasaki, only 6% of which are currently held in equities: "In a deflationary world, it makes sense to hold cash, but if deflation ended there could be a sharp move to risk assets." Some of this is likely to move into the equity markets, particularly with the introduction of the Japanese equivalent of the Isa next year.
He also believes that capital expenditure could pick up if inflation rises. He adds: "Companies have been reluctant to spend because there has been no top-line growth. This would change were inflation to return. It would affect the mindset of management. We believe that there will be huge pent-up demand if deflation were to end."
In spite of the weaker yen, exporters have so far lagged the rally in Japanese equities, but Sasaki believes that this part of the market could see stronger returns as results come in ahead of expectations. He also believes some of the materials sector stands to benefit from the weaker yen, as it raises its competitiveness both at home and abroad. He also favours the financials sector, including banks and insurance companies, which should stand to benefit from improving loan growth and an expanding economy. In general, he believes investors are rotating away from value and towards growth sectors in the markets.
Sasaki believes that the two key risks to the ending of deflation are the corporation tax hike scheduled for next April and events elsewhere around the globe: "Although the corporate tax hike doesn’t upset our main scenario, it could prompt a temporary slowdown in the retailing sector, so we are light there. The world economy is the other key risk. There is a default discussion going on in the US and this could cause some ‘risk off’ sentiment in markets. This could strengthen the yen, which would in turn be negative for Japanese equities."
