Return of Japanese inflation good news

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, believes the return of inflation is a very positive development for Japan, demonstrating that consumers are getting an inflationary mindset back after more than 15 years of deflation.

Although she believes the effects will take a considerable length of time to filter through, Chetwynd says the impact of inflation on bond returns will gradually persuade Japanese investors to shift more of their wealth into the stock market.

With Japan boasting the highest savings rates of the developed countries, she believes there is a real chance that consumers will start to spend more heavily, although, as a cyclical country, Chetwynd points out that Japan would be badly hit by a severe slowdown in the US, European, or Emerging Market economies.

Nevertheless, Chetwynd says she is ‘more positive than most' on Japan, arguing that the market 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.

She says: "The return of inflation in Japan is very good news after such a long period of deflation. It might put pressure on margins but the declining returns from bonds might prompt investors to sell out of fixed interest and into equities, which would be very positive shift.

"This will be a long drawn-out process but I think individuals are getting that crucial inflationary mindset back now, and that's very good news. There are potential challenges ahead - we would like to see a change of Government sooner rather than later, for instance - but we are more positive than most on Japan."