Bank of Japan finally decides to tighten monetary policy

March 11, 2006

The Bank of Japan, which has been holding reserves at 30 – 35 trillion yen, has decided to start reducing their reserves, thereby reducing liquidity to forestall potential inflation.This is based on the higher than expected growth of 2.8% GDP for 2005.

In fact, the OECD forecasts continued economic recovery for Japan at 2% through 2007. The economic strength is now based on domestic consumption and business spending, and less on vulnerable export growth.

What It Means:

The Bank’s acknowledgement that deflation is over is good for the economy. By deciding to lower their reserves, that means they will actively seek to discourage another bubble. This should further encourage investors to continue investing in the Japanese stock market.

Action Steps:

If you have been hesitant to get back into Japan mutual funds, you can breathe a sigh of relief…it looks like Japan Inc. (the 1980’s term for a strong Japan) is back. If you are already in Japan mutual funds, you can go celebrate – the Nikkei 225 Stock Average rose 30% in 2005, and looks like it will stabilize at these higher levels.