The Bank of Japan could hand you a buying opportunity this Friday

By MoneyWeek Editor John Stepek Apr 25, 2012

John Stepek

Share with
friends:

Comments (7) Print this article

It’s a big week for central banks. And that makes it a big week for investors too.

We’ve got the Federal Reserve announcing the results of its latest meeting today. They’re not expected to do anything. But their views will be watched closely for any hint that more quantitative easing is in the pipeline. 

Then Japan’s central bank meets on Friday. Unlike the Fed, they are expected to do something. Indeed, if the Bank of Japan fails to follow up on its February promise to print more money and return Japan to inflation, investors will be very disappointed.

The good news is that if you can cut through the noise, then this could present you with some worthwhile investment opportunities…

The incredible power of central banks

Investors have learned to pay close attention to central banks’ actions. In fact, many investment decisions are now dictated not only by what central banks actually do, but by what they hint at doing. Considerations of what’s going on in the ‘real’ economy come second.

This is a ludicrous state of affairs. There’s a very telling line in a piece in the FT this morning, by Takatoshi Ito, professor of economics at the University of Tokyo.

In the piece, Ito is talking about the Bank of Japan (BoJ), and how it needs to convince investors that it’s serious about driving inflation higher. We’ll have more on that in a moment, but this is the line that really hit me.

Talking about the power of monetary policy, he says: “In the long run, it is the central bank that determines the level of prices and the central bank that influences inflationary expectations.”

Think about that for a moment. We pride ourselves on our capitalist, market-driven system. Yet here’s an open acknowledgement that prices are set centrally by a small group of men, sitting in an office in a capital city, and making guesses at what might happen to the economy next.

It’s not quite as damaging as dictating where crops should be grown, or setting annual quotas for tractor manufacturing. But if you think that this system doesn’t distort investment decisions, or lead to massive capital misallocation, then you’re deluded.

We argue that markets are the right way to set the price for everything else. But when it comes to the most important price – the price of money - we take markets out of the equation, and hand the power to central planners.

I hope that one day, we’ll look back and wonder what we were thinking. But in the meantime, this is why investors can’t ignore what central bankers are getting up to.

Sign up for a 3-week FREE trial of MoneyWeek
and get the following free as well

"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd

The Federal Reserve’s words will be watched closely

So what are they doing now? The Fed has been holding its equivalent of the Bank of England’s Monetary Policy Committee meeting over the last two days. It’s due to announce its latest views on interest rates tonight, just after seven.

Nothing will change. Interest rates will certainly stay where they are. And with the US economy looking a bit stronger recently, the option of more quantitative easing (QE) is almost certainly off the table for now.

However, with markets getting the jitters over Europe, everyone will be desperately looking for a hint that Ben Bernanke and chums haven’t completely ruled out QE.

A hint at more QE would weaken the dollar and boost stocks. On the other hand, any suggestion that rates might rise before 2014 would send the dollar surging, and probably batter stocks and gold.

I’ve already written about the problems facing the Fed this year. With an election coming up, it’ll be tough for them to justify QE unless there’s a major market panic. So it’ll be steady as she goes for now.

But in the longer run, another panic is likely. That would mean more money printing. And that’s a good reason to make sure you’ve got some gold in your portfolio as insurance.

But the Bank of Japan is the most important meeting this week

However, the really interesting meeting this week is happening in Japan. In February, the Bank of Japan (BoJ) surprised investors by adopting an inflation ‘goal’ of 1%. It also boosted its QE efforts.

This got investors very excited. As James Ferguson recently wrote in MoneyWeek magazine: Why Japanese stocks are set to soar, the strong yen has been one of the biggest pressures on the Japanese economy. If the BoJ could weaken the yen, the earnings of exporters would rocket.

The BoJ’s actions helped the Japanese stock market to a stellar performance in the first quarter of the year. It also sent the yen lower. But with investors starting to worry about Europe again, the yen has been strengthening once more. And doubts are creeping in about how serious the BoJ is about actually committing to inflation.

If we don’t see some significant action this Friday, the yen will probably surge, and Japanese stocks will likely drop.

So what are you meant to do about this? Well, unless you’re a trader, I don’t think you need to worry. As far as I’m concerned, Japan is a buy either way.

Here’s why. Firstly, if the BoJ doesn’t disappoint, then Japan will get some momentum behind it. Investors will start to believe that the time has come for a major turnaround. That’ll be great for Japanese stocks.

And if it disappoints the market, and stocks fall? Well, I’d take the chance to buy some more. Because the Japanese government is getting increasingly aggressive and fed up with the BoJ’s refusal to follow the Fed and other Western central banks. The initial BoJ action was almost certainly the result of political pressure. If they fail to follow through, that pressure will only increase.

Secondly, and more to the point, the big difference between Japan and US stocks as a whole, is that Japanese stocks are cheap. As one of the experts at our latest Roundtable pointed out, US stocks look ‘richly valued’. With Japan, on the other hand, you get a decent ‘margin of safety’ – so your downside is lower.

You can read the piece in the next issue of MoneyWeek, out this Friday. If you’re not already a subscriber, get your first three issues free here.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Our recommended articles for today

Could the UK housing rental market be about to crack?

Despite a high demand for housing and recent rises in rents, Britain's property rental market is showing signs of strain, says Phil Oakley. And that could be very bad news for house prices.

How the Dutch crisis will affect the eurozone

The collapse of the Dutch government is another blow to the stability of the eurozone. Matthew Partridge looks at what effect it will have on Europe's continuing crisis.

Comments (7)

Published in Asian economy | More articles by John Stepek

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Chester

    (25 April 2012, 11:11AM)  Complain about this comment

    Agree totally that we will look back one day and wonder why we let totally unaccountable, unelected fools distort markets at massive cost

    We have clearly learned nothing from past experience, and through Feds worldwide, are required to tollerate currency debasement, and postponement of a correction without which sustainable growth will not return

    My blood boiled when King made clear he had no idea of the scale of QE's "unintended consequences" on pension anuities, and creation of ever increasing company pension defecits. This was sadly typical of the species. It continues to boil because I can see no legal way of making central bankers extinct before they blindly commit yet more carnage with resources we do not have

  • 2. JREwing

    (25 April 2012, 01:29PM)  Complain about this comment

    The BOJ and the Japanese Government must be out of their minds if they think boosting inflation will help Japan.

    Japan, along with France and the UK, is another major domino heading for a serious fall in the next five years.

  • 3. Martin G

    (25 April 2012, 03:05PM)  Complain about this comment

    "We argue that markets are the right way to set the price for everything else. But when it comes to the most important price – the price of money - we … hand the power to central planners." I'd go further and argue that markets not governments should also be allowed to create money according to supply and demand of goods of value. If you look on a macro economic scale at a level even higher than what current commentators regard as "macro", you'll note that never before has the world’s population of individuals who want to be economically active been larger, nor growing more rapidly –and greatly outstripping the rate of world population increase. The result is that the supply of money available to go round that potentially economically active population is inadequate. Whether anyone would want to unleash that rate of growth and demand increase for world resources is a political matter but I'd argue that the current system keeps the elites just where they want to be - in control.

  • 4. sampath

    (26 April 2012, 09:52PM)  Complain about this comment

    Sir

    I am new to forex. Could you explain

    1) QE is good for the currency to boost the economic activities, so it is a positive for the currency- we can place sell order in USDJPY(Buy the JPY)

    2) Where as in the long run it is not good for the currency as the value diminishes, so it is a negative news for the currency- we should actually place buy orders in USDJPY(Sell JPY).

    For the present QE by BOJ should I Sell USDJPY or Buy the USDJPY?

    Waiting for your reply, sir.

    sam

  • 5. MikeR

    (27 April 2012, 10:51AM)  Complain about this comment

    "Japanese stocks set to soar" (Issue 578). Since 1st March Sony has fallen 24% - oops! Is that what JF meant when he said 'limited downside'?
    Don't get me wrong - I have much respect for JF and pay attention to his opinions but is he overlooking the macro risks to manufacturing? Japan is heavily skewed to electronics and cars both of which are losing ground to their emerging Asia neighbours. Of the 12 stocks mentioned in the article only one share and one fund are up and this morning's affirmation of QE hasn't changed that.
    I am minded to believe that this is indeed a buying opportunity but it rather seems that few others agree. Clearly one needs to be brave to be a contrarian.

  • 6. Jim

    (27 April 2012, 04:25PM)  Complain about this comment

    Problem is if Japan is successful in increasing inflation wouldn't that affect the cost of imported fuel as the value of the currency fell?

  • 7. Ceres

    (06 May 2012, 01:44AM)  Complain about this comment

    Many puzzling things here. First:
    "the Japanese government is getting increasingly aggressive and fed up with the BoJ’s refusal to follow the Fed and other Western central banks"

    That seems unlikely. The usually concern expressed is that central bankers are too easily influenced by politicians, and independence is a virtue.

    Next, regarding pernicious nature of central bankers and capitalism: Strong central planning is the keystone of a socialist economy. A strong Japanese central bank makes sense for an economy that is somewhere between capitalism and socialism. It is a different matter for other countries, as to the level of influence the central bank should have over fiscal policy. All central banks can't be lumped together.

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>