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Japanese
growth is slowing, inflation is accelerating and record
food and energy costs threaten to do increasing damage
to Asia’s biggest economy. What should investors do? Buy
Japanese stocks.
That’s
the advice Russell Napier, a strategist with brokerage
CLSA Ltd. in London, is giving these days. He says
Japanese stocks are on the verge of a rally as the
fastest inflation in a decade prompts institutions and
individuals to dump low-yielding bonds and deposits in
favor of equities.
Inflation, Napier said at a June 20 seminar in Tokyo,
will trigger three things: a shift from bonds to
equities, a consumer-spending boom and improved
profitability for manufacturers.
Napier’s
view is predicated on accelerating inflation spurring
households to move some of their ¥1,500 trillion ($14
trillion) of assets into stocks to counter the erosion
of wealth from higher prices. Consider this a notable
flash of bullishness from the author of the 2005 book
Anatomy of the Bear: Lessons From Wall Street’s Four
Great Bottoms.
There’s
just one problem, and Japanese call it “Generation D.”
Japan’s Yomiuri newspaper last week headlined the
phenomenon that economists have long been trying to
grasp: “Deflation Generation.”
It’s a
fascinating issue in the nation of 127 million as
inflation begins to take hold after more than a decade
of falling prices. Core consumer prices, which exclude
fresh food, climbed 0.9 percent in April from a year
earlier after rising 1.2 percent in March, the fastest
pace since 1998.
Deflation psychology
While
Japan doesn’t have an inflation problem, such increases
may shock those who came of age professionally during
the deflation years. Curiosity focuses on the 26 million
Japanese the Yomiuri lists as being 39 years old or
less, the demographic that might be most acclimated to a
falling-price environment.
The
question is whether a little inflation will be amplified
in the minds of many consumers, thereby exacerbating its
influence on the economy.
“It’s
worth noting how many Japanese aren’t used to a world
where inflation is rising,” says Hiromichi Shirakawa,
chief economist at Credit Suisse Group in Tokyo. “It
will make for a very interesting time as prices go
higher and higher.”
Like
Napier, investors are wondering if inflation will boost
consumer spending. A “buy now” psychology could emerge
as surging oil and food costs fuel inflation
expectations.
Whatever
happens, inflation’s return to Asia’s biggest economy
makes for a shaky outlook.
****
Sri
Lanka has its own inflation challenge to grapple with.
Actually, make that a huge challenge.
Consumer
prices in the capital, Colombo, rose 26 percent in May
from a year earlier, and that’s not a typographical
error. Oddly, Sri Lanka’s central bank isn’t raising its
benchmark interest rate. Last week it left the rate at
10.5 percent for a 16th-straight meeting.
Policymakers are choosing to bolster growth even as
inflation runs at the fastest in at least four years.
Admittedly, central bank governor Ajith Nivard Cabraal
faces pressures such as increased violence in the
island’s 25-year civil war. And short-term rates are
already the highest since 2002.
Economists are right when they say officials in Colombo
need to strike a balance between maintaining growth and
managing inflation. And this is an Asia-wide plight. The
trouble is, Sri Lankan officials are too focused on the
former and not enough on the latter. Sri Lanka’s future
is at stake as rarely before.
Fitch
Ratings is right when it says the central bank may need
to consider increasing the proportion of deposits that
commercial lenders must place with it or let the
currency appreciate to cool runaway inflation.
There’s
no doubt Asia’s 17th-biggest economy needs peace in
order to prosper. At the margin, though, the surging
cost of living doesn’t help.
****
South
Korean voters have a beef with President Lee Myung- Bak,
and it’s much on the minds of investors as his support
rate edges lower and lower.
It’s an
odd thing, considering how foreign investors were so
enthused by the election of the former Hyundai Group
chief executive. A couple of missteps and massive
protests later and investors are wondering what gives.
The
biggest snag involves Lee’s April decision to resume US
beef imports. His approval has sunk by more than half in
the four months since he took office thanks to that
call. It prompted a flood of protesters to take to the
streets to resist what they say is dangerous US beef.
It’s the
kind of distraction one of Asia’s most promising
economies can’t afford as it grapples with the fastest
inflation in seven years. Inflation accelerated to 4.9
percent in May, exceeding the central bank’s target
range for a seventh month. Growth in Asia’s
fourth-biggest economy slowed to 0.8 percent in the
first quarter, the weakest pace in more than a year.
Korea’s challenges aren’t unique in Asia, a region where
stagflation risks abound. They would be easier to handle
if Korea’s leader wasn’t preoccupied with calming the
masses. |
