The Bank of Japan and a weaker yen could lead to recovery in Japan

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Bank of Japan (or BoJ) support. The nation’s central bank seems committed to its goal of reaching 2% inflation, aiming to continue its monetary easing plan for the next two years or so.

Market Realist – Japan’s inflation woe isn’t new. It stretches back two decades. In fact, Japan (EWJ)(DXJ) has seen even negative inflation in some years. The three-pronged approach by Prime Minister Shinzo Abe—or “Abenomics”—has led to monetary easing. It’s important to note, though, that Japan needs inflation coupled with wage growth. Inflation without wage growth will have an adverse effect on consumption, as it reduces disposable income.

The U.S. (SPY)(IVV) successfully raised its inflation from the less-than-2% levels we’d seen since last year. This move alleviated the foreign exchange pressure that emerging markets (EEM) saw earlier in the year.

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Lower valuation of the Japanese yen. As Russ Koesterich notes in his latest Investment Directions, “global sentiment remains a major source of risk for both the yen and Japanese stocks, the United States’ and Japan’s divergent monetary policy paths will likely place downward pressure on the yen”. This should, in turn, help support corporate earnings.

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