The Nikkei 225 hit a 15-year high on Wednesday even as the Bank of Japan left its monetary policy unchanged. Ignoring the lone voice of dissent, a majority of the central bank’s policy board voted to keep asset purchases at their current level. Meanwhile, opinion is divided as to whether stimulus should be wound down or increased over the coming months.
Destabilizing Financial Markets
Some central bank officials believe that the current program of monetary stimulus may have some undesirable consequences for financial markets. In particular, it could harm bond markets and lead to potential bubbles, which could potentially be harmful over the longer term.
Monetary stimulus has boosted stocks to record highs and pushed the yen lower. Both these effects have proved beneficial to the economy in the short term. However, the BoJ’s measure of inflation declined to zero in February. This has led to fears that financial market distortions may arise even before the inflation target is achieved.
Risks of Delaying Additional Stimulus
On the other side of the debate are calls for further additional stimulus. Some market watchers believe that equity market gains have been the only perceptible positives for the economy. Excluding this stock surge, there is little Prime Minister Shinzo Abe can show as tangible results of his stimulus measures.
Some of the original proponents of Abenomics believe that the central bank should not delay additional stimulus for too long. They point to weak consumer spending and the reluctance of large manufacturers to increase investment. This could soon lead to deflationary tendencies, they believe.
Kuroda Resilient
The central bank’s governor Haruhiko Kuroda dismissed the proposal to reduce the size of monetary stimulus. Speaking at a news conference, he said that since price stability had not been achieved, such reductions were unlikely at this time.
At the same time, Kuroda said he believes that monetary easing has been effective. Emphasizing the reduction in the gap between supply and demand, he also spoke about the increase in nominal wages and improving inflation expectations. He also said that once the oil price situation stabilizes, Japan will achieve its inflation target. Further, he denied that a stock market bubble was building up, attributing such gains to strong earnings.
Despite calls for further monetary easing, Kuroda denied that further action in this direction was on the anvil. He believed that last October’s concerns had been addressed. This was when stimulus was increased over deflationary concerns, following the slump in oil prices.
Our Choices
Despite some element of risk, Japanese markets continue to make steady gains. Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Mitsubishi UFJ Financial Group Inc (NYSE:MTU) is the world’s largest bank-holding company with ¥279.2 trillion in total assets as of Dec 31, 2014. The company trades on the Tokyo, Osaka, New York, and Nagoya stock exchanges.
Mitsubishi UFJ Financial holds a Zacks Rank #2 (Buy). The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.11. The consensus estimate for the current year has increased from 61 cents to 69 cents over the last 60 days.
Kyocera Corporation (NYSE:KYO) is a manufacturer and distributor of industrial components as well as telecom and IT equipment across the world.
Apart from a Zacks Rank #1 (Strong Buy), Kyocera has a P/E (F1) of 23.40x. The consensus estimate for the current year has increased from $2.06 to $2.22 over the last 60 days.
The central bank governor’s confidence in current policy measures may yet bear fruit. At the same time, further stimulus over the next few months cannot be ruled out. This is why these stocks would make for a prudent choice.