Fearing a return of what he called the “deflationary mindset,” fostered by a weak economy and falling energy prices, Bank of Japan Governor Haruhiko Kuroda was pledging last week that “there was no limit” to what his printing presses could do to keep inflation above 2 percent.
He is not bluffing. Markets are right to take him seriously. Over the last twelve months, markets handled the avalanche of yen liquidity by taking the Japanese currency down 19 percent against the dollar and 11 percent in trade-weighted terms.
During that period, the Nikkei 225 was pushed up 13.4 percent. That sounds like a lot, except perhaps to those proverbial Japanese housewives dabbling in global investing. They faced a whopping 36 percent opportunity cost by staying in yen: a 17 percent return on the S&P 500 and a 19 percent gain on the yen/dollar exchange rate. The dollar-based investors also incurred a 6 percent loss on their yen portfolios.
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