Anecdotally, Japanese equities have been the whipping boy
for a long period of time (and also ugly since 1990):
That is an ugly chart. But times are a changing:
If you’re wondering why here
is a quick, universally accepted, summary:
Mr. Kuroda (Bank of Japan’s new governor) promised to double Japan’s monetary base as well as its holdings of Japanese government bonds. The maturity of the bonds it purchases will increase from an average of about three to seven years. To make its intentions clear, the bank merged its quantitative-easing programme into its regular operations. This time there was no need to read any tea leaves: the BoJ simply said it "will achieve" inflation of 2% in about two years’ time.
In short, the Japanese are trying to create inflation by
purchasing bonds. Similar to what the
Fed is doing here - quantitative easing where cash at central banks is used to
purchase bonds. The difference
is in Japan this is on a relatively more massive scale.
This in turn has depreciated the Yen versus the dollar,
which is why while the ^N225 is up 70% buying an ETF (EWJ) and converting back
to dollars would only have you up 35%.
But given the dearth of ETF products you can purchase an ETF that hedges
out the Yen’s decline (DXJ) and be up a little over 60%.
In the past when Japan has tried something similar to this on a much smaller scale, the equity market rallied over 100%. Still the equity market also has a 20 year history or large moves up followed by large moves down. So while there appears to be some more room left to run in the equity market (and for USD vs. Yen) given the size relative to past QE experiences, there is a certainly a question of sustainability considering the history of the equity market and what appears to be smoke and mirrors by the BOJ.
Past performance is no
guarantee of future results. International
investing involves special risks, including, but not limited to, the
possibility of substantial volatility due to currency fluctuation
and political uncertainties. The views and opinions expressed herein are
those of the author(s) noted and may or may not represent the views of Capital
Analysts, Inc. or Lincoln Investment.
