Japan’s moderate expansion can reduce your risk

May 20, 2006

The Bank of Japan released a report stating the factors they believe will contribute to sustainable, moderate growth throughout 2007:

• Corporate profits increased for the fourth consecutive year, and companies expect strong profits in 2006.
• There are more job offers than applicants.
• Companies no longer have excess plant capacity.
• Most importantly, private consumption is expanding. In fact, it is expected to be the main driving force, thanks to wage increases.
• Home prices, especially in cities, are increasing.

These increases mean that inflation has become a concern, which is good news for an economy that has been fighting deflation for the last decade.

What it Means:

The Bank has learned from the boom-and-bust cycle they experienced in the 80’s, and therefore is guiding the economy towards a slower, yet sustainable, growth rate of 2 - 2.5%. This steady growth means less volatility for Japanese economy itself, and more resilience for the global economy overall.  Since Japan is the world’s second largest economy, its moderation will help balance any large declines in more volatile economies.

Action Steps:
Look at increasing the amount of Japan sector funds in your portfolio. This is also a good way to protect yourself against the dollar decline - since Japanese companies receive revenues in yen, their value appreciates when the dollar declines.

Source:
The Outlook for Japan's Economy and the Conduct of Monetary Policy - Summary of a Speech Given by Toshihiko Fukui, Governor of the Bank of Japan, to the Naigai Josei Chousa Kai (Research Institute of Japan) in Tokyo on May 15, 2006