BOJ Caution Less Worrisome Than Tepid Vista Response

Investors continue to look over their collective shoulders for any sign of a bear market. This is because dividend yields are at historically low levels, bonds offer little merit sans inflation risk, and P/E multiples remain at historically high levels, despite the great sell-off of 2000 and the inflation scare in 2006.

Why do markets remain so buoyant? The simple answer is; continued low inflation. The importance of inflation (or lack thereof) to market cycles is why everyone is so focused on the Fed and the BOJ’s monetary policy, as the main responsibility of central banks is to maintain price stability. Given price stability, markets can remain buoyant and investors can tolerate historically high levels of risk.

Yet Japan’s BOJ just can’t win. The Bank is blamed with at least "sins of omission" in creating a massive global yen carry trade, continued under-valuation of other Asian currencies, inhibiting domestic consumption, and fostering an outflow of Japan’s savings pool from Japan, all of which ostensibly is having a malign influence on the global economy.

Excuse me? The global economy is booming and equity markets are robust. The yen carry trade is a cause for abundant global liquidity, but is that so bad? We, for one, believe that caution on the part of the BOJ is imminently healthier for investor portfolios than a “macho” BOJ intent on proving its independence and “normalizing” Japanese interest rates. Thanks to a “wimpish” BOJ, Japanese corporate profits are expected to record their third consecutive year of two-digit gains, and the Nikkei 225 is renewing its April 2006 high on its journey to the 20,833 high set in April 2000.

Indeed, investors should be more concerned about the tepid response to Microsoft’s (MSFT) Vista. US PC makers are reportedly reducing semiconductor purchasing plans, triggering DRAM inventory adjustments and rapidly falling spot prices, causing two-digit year-to-date losses in stocks like Tokyo Electron, Advantest (ATE) and NEC Electronics. At this point, alpha seekers should switch into other electronic component stocks like Mitsumi or Taiyo Yuden (TTOYY), which is yet another example of polarization in the Japanese market.

Disclosure: Author has no position in any of the above-mentioned securities.