MW-80 -- Six Weeks In, How Is The Big Picture Shaping Up?

J@pan Inc Magazine Presents:
Weekly Financial Commentary from Tokyo

Issue No. 80
Wednesday, June 16, 2004

@@ VIEWPOINT: Six Weeks In, How Is The Big Picture Shaping Up?

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@@ VIEWPOINT: Six Weeks In, How Is The Big Picture Shaping Up?

Rather embarrassingly, on the day I took over the baton writing Money
Watch and expounded on my bullishness on the Japanese economy and the
Japanese stock market with a few technical indicators, the Nikkei dropped
to 10,500, bringing into question the technical indicators quoted and
perhaps the whole bullish view. So have I changed my mind?

The short answer is no, and here's why.

There has been a whole slew of data supporting the bullish view, GDP is
growing and the engines to GDP growth are broadening. Most encouraging
has been the increase in consumer spending. There is increased data
to support the broadening of industrial investment, companies are hiring
and families appear to be feeling wealthier.

On the other side of the picture long term interest rates have continued
to climb in Japan, which indicates that there is an increasing
expectation that, at the very least, deflation is disappearing and there
is the possibility of inflation returning to the system. My view is that
inflation is coming to Japan and it will be a positive force, provided
that it does not get out of control.

Given the newfound down-to-earth and pragmatic moves of the Bank of
Japan (BoJ) since Toshihiko Fukui took over, I believe the BoJ has the
ability to manage this process -- something I could not have said under
his predecessor.

A certain degree of inflation will be imported from the recent increase
in commodity prices, especially from energy, as Japan relies exclusively
on imports for the vast proportion of its energy needs. With a globally
historic perspective, such inflation has been seen as bad. But in the
current situation in Japan it should been seen as positive.

Inflation imported with commodity prices will help dispel the last
vestiges of deflation from the system and hopefully help return Japan
to modest stable inflation in a short period of time.

But there is a second potential boost from the increase in commodity
prices, or maybe it would be better stated as a scenario that will help
to mitigate a constant source of concern over the last 10 years --
the strong yen. The most significant imports for Japan are oil and gas,
and the import bill (in yen) has increased significantly through greater
demand and the cost in yen. These costs will be passed on mainly in
the domestic market, helping to increase inflation, but will have only
an incremental price effect on the high value-added products that are
exported to Asia and the rest of the world from Japan.

This will increase the supply of yen in the market, thus reducing the
pressure on the appreciation of the yen. This can only be good to
maintain the momentum of the recovery.

So my conclusion has not changed. I am long on equities and short
bonds in Japan and would like to find a good method to get long on
real estate in Japan. Alas I have serious reservations about J-REITs
(or at least the J-REITs that are currently in the market).

More on that over the next few weeks.

-- John Charles-Decourcy

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Written by John Charles-Decourcy (

Edited by J@pan Inc staff (


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