A Sea Change In Japan

247Bull.com Editor: It is hard to believe that 23 years ago (almost to the day), the Nikkei reached an intra-day high of 38,957.44. Today it trades at 10,160.40. If the new leadership in Japan launches a sustained attack against the Japanese yen and is successful in generating inflation, then an allocation to the Nikkei certainly makes sense. However, as discussed on Monday, a more direct way to profit might be to short the yen against the Australian dollar.

Shinzo Abe and the Liberal Democratic Party (LDP) won a crushing victory in Japan’s general election this weekend. In the coming months, Japanese equities will behave as a bellwether for the LDP’s progress in pressuring the Bank Of Japan (BoJ) to become more aggressive.

As we have previously highlighted, the bullish case for Japanese equities depends strongly on domestic politics and monetary policy. This weekend’s general election was unambiguous and gives the LDP a strong mandate. The party is calling on the BoJ to act aggressively: to increase the inflation target (currently 1%) and begin unlimited quantitative easing.

It is widely known that Japanese equities offer good value, but the strong yen continues to suffocate growth and sustain price deflation. Hence, the precondition to unlocking the Nikkei’s value is to reflate the economy and end deflation, both of which will require a substantial devaluation in the yen.

The sea change in political leadership offers the best chance in many years for this to occur. At the cusp of change, we recommend investors stay long the Nikkei on a hedged basis.

Article courtesy of http://bcaresearch.com

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