In yen terms, the Nikkei has risen 50.4% over the past six months, clearly outperforming most other equity markets, and in sterling terms this increase has been 24.4%.
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But while the currency has been devalued, inflation is yet to pick up and according to some there comes a point when people may start to lose faith in an ever-weakening currency.
Add this to the backdrop of the G7 countries categorically stating they do not want a currency war, and it becomes clear that further devaluation of yen could cause more trouble than good.
One reason alone for rises
Mark Harris, fund manager at City Financial, said: “The market has rallied for one major reason, the election of the new prime minister and the new governor of the Bank of Japan. They have shown willing to devalue its currency, and to push inflation up to make their exports more competitive.
“This is all fine, but the quantitative easing package implemented by the government is almost the same size as that deployed in the US, an economy which is more than double the size of Japan. And we have yet to see any evidence that it is working; vehicle sales are still stagnant and inflation is yet to pick up.”
Further, while QE may be reducing the cost of exports, it is also increasing the cost of imports including mineral fuels, upon which Japan is heavily reliant. This will stoke issues in terms of trade deficits and costs at home.
Words of caution
The country’s debt to GDP ratio, which currently stands at 200%, is another reason for caution according to Harris. If people start to sell bonds because of rising inflation, it could set off a vicious cycle of increasing costs.
Harris said: “I’m sceptical. If the Bank of Japan is not successful in its endeavours you could lose a lot of money very quickly.”
Are you pro- or anti-Japanese equities? See the counter argument from Gary Dugan.
