How do you avoid losing money in the Japanese market?
Readers know that we are not scared of higher rates as of 3Q06 in Japan - even if GDP growth is reasonably strong.
We won't belabour our mantra that in Japan, policy-making is a tribal affair. The Bank of Japan is but one member of Japan, Tribe.
We all know that Japan's budget deficit is about 150% the size of its GDP. That means higher Value Added Taxes (VAT) next year. So the Ministry of Finance fellows are not keen on higher rates AND higher taxes.
A new twist emerged in The Economist of 20th May 2006, p. 30: Japan's pension funding is under the gun. Basically, pensions are funded by those who work paying those who are retired. Some useful points in said article are that -
* Age - The proportion of people over 65 is 19.5% - the highest in the world. Implication: there are less and less working people to pay retirees.
* Disillusionment - Currently, 36% of all Japanese are not paying into the pension system. In the 20-24 year old age bracket, that proportion is a scary 50%!
Mr. Tara Kono, Vice Minister, wants to circumvent these two funding problems by stopping contributions altogether and instead introducing a consumption tax.
The upshot: expect two tax hikes in Japan within the next couple of years. We all know how badly the economy got knocked during the last rounds of VAT hikes, so it just seems inconceivable that Japan, Tribe, would repeat the same mistake. After all, insanity is defined as doing the same thing time and bime again - but expecting different results!
The bottom line: In the third quarter, we might get a token rate rise, but it will be immaterial. Too many tribal members have much bigger issues than nascent inflation to worry about.
Money-making implication: Once the dust has settled in global markets, buy back into Japan.