Why investors in Japanese stocks should consider Kuroda’s remarks

Straight from the horse’s mouth

Haruhiko Kuroda, the Bank of Japan’s Governor and the main person driving Prime Minister Shinzo Abe’s monetary policy, gave a press conference on Monday about the central bank’s policies. You can find the text of the speech at the Bank of Japan’s website. Although Kuroda did not announce any expansion of asset purchases, he did review the positive economic data since the spring and reinforced the central bank’s intent to increase the inflation rate to 2% by 2015.

Kuroda has some evidence that his policies have helped the country’s economy. In the last year, Japan has come out of its deflationary slump and non-manufacturing output has recovered to pre-crisis levels. However, nominal wage growth is still stagnant and business investment has yet to be a contributing factor. But it’s hard to see how these two components don’t accelerate as the central bank continues to expand the money supply and inflation expectations begin to rise.

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The yen’s depreciation is a sign that the expansionary monetary policy is having its intended effect on the Japanese economy. Looser money depreciates a country’s currency along with driving down real interest rates in the short term.

What does this mean for Japanese stocks?

Japanese stocks remain a good pick for 2014. Stocks benefit from increases in real growth, which should pick up as aggregate demand rises in the country. Yen depreciation will likely continue, however, leading me to favor the WisdomTree Hedged Equity ETF (DXJ) over the unhedged iShares MSCI Japan ETF (EWJ).