Japan 05 (Apr 15 - Jul 19)

Re: Japan 05 (Apr 15 - Jun 17)

Postby winston » Fri Jul 14, 2017 8:11 am

The Case For Japanese Stocks

In early 2016, the BOJ shocked markets when it cut its benchmark rate below zero. Counter to their desires, it shook global markets, including Japanese stocks (which they desperately wanted and needed higher).

And it sent capital flowing into the yen (somewhat as a flight to safety), driving the value of the yen higher and undoing a lot of the work the BOJ had done through the first three years of its QE program. And that move to negative territory by Japan sent global yields on a mass slide.

By June, $12 trillion worth of global government bond yields were negative. That put borrowers in position to earn money by borrowing (mainly you are paying governments to park money in the "safety" of government bonds).

The move to negative yields, sponsored by Japan (the world's third largest economy), began souring global sentiment and building in a mindset that a deflationary spiral was coming and may not be leaving, ever—for example, the world was Japan.

And then the second piece of the move by Japan came in September. It was a very important move, but widely undervalued by the media and Wall Street. It was a move that countered the negative rate mistake.

By pegging its 10-year yield at zero, Japan put a floor under global yields and opened itself to the opportunity to doing unlimited QE. They had the license to buy JGBs in unlimited amounts to maintain its zero target, in a scenario where Japan's 10-year bond yield rises above zero. And that has been the case since the election.

The upward pressure on global interest rates since the election has put Japan in the unlimited QE zone--gobbling up JGBs to push yields back down toward zero--constantly leaning against the tide of upward pressure. That became exacerbated late last month when Mario Draghi tipped that QE had done the job there and implied that a Fed-like normalization was in the future.

So, with the Bank of Japan fighting a tide of upward pressure on yields with unlimited QE, it should serve as a booster rocket for Japanese stocks, which still sit below the 2015 highs, and are about half of all-time record highs--even as its major economic counterparts are trading at or near all-time record highs.

Source: Forbes
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