The Week In Hindsight, 25 April 2014

The NIKKEI closed marginally lower this week as the effects of earlier comments from the BOJ began to wear off and uncertainty continued to build over Friday’s inflation numbers. Despite the move lower in Japanese stocks, the week did yield a number of positive developments for both investors as well as the Japanese economy.

The new Chairman of GPIF (Government Pension Investment Fund) reasserted his belief in the findings of a recent government endorsed study, which he took part in, that recommended a broader and more diverse asset allocation among GPIF investment portfolios.

In more detail, the study found that in order to ensure the liabilities of the fund would be met in future years it should consider greater diversification of its portfolios, and a higher allocation to risk assets such as stocks. This bodes well for investors in Japan as such a move already seems to have support from the political class.

Given that the new Chairman was hand picked by Shinzo Abe to take part in the original study, and now that he has since been appointed to lead the fund, it seems appropriate to assume that the report’s recommendations were well received in the halls of government.

Further from here, when considering that $43.7 billion of inflows into Japanese stocks last year was sufficient enough to drive the NIKKEI toward record gains, it becomes easier to get excited about the prospect of a shifting status quo at GPIF. This is because if even a small portion of the fund’s $1.26 trillion of assets were transferred into local equities, the effects could potentially be significant.

In a further positive move for the economy and investors, CPI inflation posted its largest increase for two decades on Friday as the first (post tax increase) reading of price pressures within the economy was announced. Although the official figure was slightly below expectations, it did go some way toward demonstrating that Japanese companies have been confident enough to pass on the increased costs to their customers.

The general consensus at present is that the move in inflation will be likely to see the BOJ holding fire on providing any further stimulus to the economy when it announces its most recent monetary policy decision on Wednesday. Despite this, our outlook sees strong support for the NIKKEI at or around the 14,000 level while our expectations for the performance of JPY stocks over the year remains positive.