The return of inflation in Japan is good news for its economy and could trigger an overdue shift out of bonds into equities, according to Resolution Asset Management.
Natasha Chetwynd, manager of the ResolutionAsset Japan fund, says that whilst the return of inflation in Japan might put pressure on margins, the declining returns from bonds may prompt investors to sell out of fixed interest and into equities, which would be a very positive shift. However, the effects will take a considerable length of time to filter through.
With Japan boasting the highest savings rates of the developed countries, Chetwynd believes there is a real chance that consumers will start to spend more heavily, although, as a cyclical country, it would be badly hit by a severe slowdown in the US, European, or Emerging Market economies.
'More positive than most' on Japan, Chetwynd argues that the market there is cheap on a historical basis with many stocks trading on 8-12 times earnings. She also believes the market is increasingly taking poor forecasts in its stride, with a general consensus that companies are being conservative and posting numbers that may not fully reflect their earnings prospects.
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