Shaw Capital Management Investment Equity Markets 2010 Part 2

For the moment attention is focused on the strength of the German economy, and the beneficial effects that will be felt elsewhere in the zone; and there has also been a relaxation of tension about debt defaults, after the rescue package agreed by the member countries, and the intervention by the ECB to support the weaker bond markets. The German export performance depends of the maintenance of strong growth in the global economy that may not be sustained; and the odds still suggest that one or more of the weaker countries will at least be forced to defer interest payments on its sovereign debt, and may even default. The latest improvement in the markets therefore seems likely to need further support from Wall Street if it is to be sustained. The best performance amongst the major markets over the past month had occurred in the UK market. The measures announced by the new Coalition government to reduce the size of the fiscal deficit have been well received by the market, despite the fact that they will slow down the pace of the economic recovery over the coming months; and the latest estimate of a 1.1% growth rate in the second quarter of the year suggests that the effects of the fiscal retrenchment might even be less than had been expected, and has removed most of the fears about the possibility of a move into a “double- dip” recession.

The improvement in sentiment amongst investors is therefore easy to understand. Even before the announcement of the estimate of growth in the second quarter of the year, there had been further evidence of an improving economic situation. The unemployment rate fell; retail sales volumes rose by 1%, the strongest monthly increase in almost a year; and the latest quarterly survey from the CBI reported that manufacturing output increased at its strongest rate since 1995.

The 1.1% estimated rate was well above most forecasts. It was the result of expansion in both the manufacturing and services sectors of the economy. But the most surprising figure was the estimated 6.6% rate of growth in the construction sector that accounted for around one third of the overall growth in the period. It has also produced considerable interest regarding the reaction of the Bank of England to these figures. The bank has previously been mainly concerned about the risk of slower growth, and had even considered at the last meeting of its Monetary Policy Committee “arguments in favour of a modest easing in monetary policy” because “prospects for gross domestic product growth had probably deteriorated a little over the month”.

The mood will have changed now; but the governor, Mervyn King, has recently indicated that there will be no early changes in policy as a result of one set of figures. The background factors affecting the market therefore remain. Short-term interest rates will remain low, and the economy is performing better than expected; but the austerity measures that are to be introduced, and especially the increase in VAT in January, will depress demand over the coming months. It therefore seems likely that the UK market, like the markets in mainland Europe, will need further support from Wall Street if the recent strength is to be sustained.

The Japanese market is lower over the past month. There has been further evidence that the pace of the recovery in the Japanese economy is weakening; andthe poor performance by the ruling Democratic Party in the recent election seems likely to lead to a period of political uncertainty that will make it difficult for action to be taken to reverse the trend.

The earlier decision to introduce measures to reduce the massive fiscal deficit was a major reason for the government’s poor election performance in the election, and may well be reversed; and the Bank of Japan’s action to try to increase the rate of bank lending, especially to smaller companies, also seems unlikely to have much of an effect on the economic situation. The background situation in Japan is therefore very disappointing, and this is reflected in the performance of the equity market. It seems unlikely that there will be any early improvement in the situation, and so the Japanese market weakness looks set to continue.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Deadlock for Japan

The Democratic Party of Japan’s (DPJ) landslide victory in the Lower House election a year ago ushered in euphoric predictions of bold new policies, and even a transformation of the Japanese political system. There were widespread hopes that the DPJ would end the run of short-lived leaders. Instead, Prime Minister Yukio Hatoyama’s tenure proved to be a slow-motion train wreck. Indeed, the DPJ quickly showed itself to be no more competent in governing Japan than its much-derided opponent, the Liberal Democratic Party (LDP).

After shedding its two albatrosses of Hatoyama and general secretary Ichiro Ozawa, and many of its earlier campaign pledges, the DPJ hoped for a respectable showing in the last Upper House election. Instead, the ruling DPJ suffered a stunning defeat, when voters had the opportunity to show whether they were confident in Prime Minister Naoto Kan’s just over 1-month-old administration. The party ended with only 106 seats, far short of the 122 needed for an outright majority. The gap is too large to be filled by creating a coalition, because the most likely potential partners also lost seats.

As a result, the DPJ coalition can no longer ensure approval of its legislative initiatives. A twisted parliament portends even greater legislative stalemate and political gridlock. Gerald Curtis, a professor at Columbia University in New York and a long-time expert on Japanese politics, said the election had returned Japan to the paralysis and gridlock of the past few years. “You cannot pass a budget now in this political environment. You’ll have weak and unstable government. While the world changes fast, the Japanese government will change very slowly”. Trying to put a good face on the results, Kan said he viewed the election as a “starting point” for his push for a more responsible government ... The policy implications of the election outcome do not suggest an aggressive approach to monetary, fiscal or structural policy over the next few months.

Indeed, the attention of the large parties will most likely be focused on internal matters, leaving less time for focus on the economy. Gridlock is bad for the economy and for investor sentiment if policy drift continues for a prolonged period. According to Alan Feldman, managing director at Morgan Stanley in Tokyo, there are so many pressing problems in the Japanese economy that the costs of gridlock could be very high. In particular, pressure on the Bank of Japan for more aggressive monetary policy will likely be minimal, at least until political disarray ends. Without strong political leadership little progress is likely on budget priorities. The same goes for tax decisions.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Kasabe Shaw Capital Management Investment Equity Markets 2010 Part 1

Equity markets have rallied over the past month, sentiment has swung once again towards a more optimistic view of the prospects for the global economy, and concerns about sovereign debt defaults in Europe have eased.

Wall Street has recovered from the sharp sell-off in late-June, helped by some encouraging second quarter earnings reports; and markets in Europe have responded, with the UK market providing the best performance over the month. The worst performance amongst the major markets has occurred in the Japanese market because of disappointing economic news and increased political uncertainty after the setback for the government in the recent election.

The general improvement in the markets over the month is a welcome development. The gloom in April and May about economic prospects was clearly overdone. The US economy is performing as expected, and the Chinese authorities are clearly intent on preventing their economy from overheating.

The global economic recovery will therefore proceed at a slow pace. The sovereign debt crisis in Europe remains unresolved and defaults remain a real possibility. The risks have therefore increased in the bond markets, and this has provided support for the equity markets. So long as monetary policy remains supportive, the global recovery should eventually produce a sustainable improvement in bond prices; but some of the current uncertainties in the bond markets must be resolved before this can occur. The performance of the US economy remains the key factor is assessing the prospects for the equity markets. There has already been a request to Congress for additional spending programmes “to keep the economic recovery on track”, and although there has been no response so far, some action may become necessary. The excess gloom has disappeared, fears about sovereign debt defaults in Europe have eased, and there have been encouraging corporate results from a number of major companies, including Microsoft, Caterpillar, UPS, and Intel. Problems still remain in the banking sector, and have been reflected in the fall in earnings from investment banking at Goldman Sachs, Citigroup, Bank of America, and JPMorgan; but overall investors have been reassured that corporations are coping fairly well with the present situation. Mainland European markets have also recovered from the sharp falls. There has been encouraging news about the economic background in the euro-zone; fears about sovereign debt defaults have eased; and the latest “stress tests” have only revealed weaknesses in seven of the ninety-one banks that were included in the survey.

Euro Markets have therefore been able to follow the upward trend on Wall Street, and regain recent losses, despite the uncertainties that have still to be resolved.

Conditions are clearly continuing to improve in many areas of the euro-zone economy, and especially in

Germany, helped by the big fall in the value of the euro in the first half of the year, and the strong growth in many of the export markets in the developing world. German companies have taken full advantage of the competitive currency and the available export opportunities, and so, even though domestic demand has remained relatively weak, the German economy is now expected to grow by around 2% this year.

The situation is very different in Greece, Spain, Portugal, Ireland, and even in Italy, and these weaker economies are obviously acting as a drag on the overall performance of the area. The latest purchasing managers indices for both the manufacturing and services sectors of the area are higher, and argue against a pessimistic view of growth prospects; but for the moment we have left unchanged our modest forecasts of overall growth around 1.5% this year. The European Central Bank is clearly more optimistic about prospects. So far it has not raised its growth forecasts; but based presumably on the assumption that the recovery from recession is soundly based and self-sustaining, its reaction to the present situation contrasts sharply with the cautious view of the Fed. The president, Jean Claude Trichet, is arguing that further public spending cuts and tax increases should be introduced immediately, especially in Europe, but also elsewhere in the industrialised world. “Without the swift and appropriate action of central banks” he recently argued, “and a very significant contribution from fiscal policies, we would have experienced a major recession. But now is the time to restore fiscal sustainability”. It is not clear what the consequences of this view might be; but the central bank might even be encouraged to tighten monetary policy as the present programme of fiscal retrenchment develops.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Portfolio Performance 2010

We have made no changes in our portfolios this month. The swing in sentiment towards a more favourable view of prospects for the global economy is encouraging, and has been reflected in the recovery in equity prices. We have therefore decided to maintain our holdings in Euro & US equities. We continue to retain our 10% holding in cash deposits as a contingency measure. The sovereign debt crisis remains a very serious threat, thus we have zero exposure to bonds.

World Growth

There has been much talk in recent weeks of a ‘double- dip’ recession, as some weak figures have come out. However wobbles of this type are fairly typical in a recovery from a severe recession. In our view the recovery remains in line with the path we have laid out before. This was for a world recovery that would be restrained by raw material shortages, which would put constant upward pressure on their prices. So we see world growth this year at around the 4.5% rate, well below the 5.5% figure being registered at the height of the boom; notice that the world is not ‘catching up’ the lost output of 2009, rather it is reverting to a slower growth path from the lower output base. Even with this pattern raw material prices have been very strong, with oil for example near the $80 a barrel mark. The rises in these prices forced China and India to tighten policy and restrain their fast recoveries to prevent inflation. Even now in India inflation is not yet under control, having reached 13.9% in May, and policy will need to tighten further. On a lesser scale inflation has become threatening in a number of emerging market countries. So what we are seeing is that the fast-recovering countries mainly in East Asia are having to restrain their growth. Meanwhile in the OECD countries where inflation remains muted … or in the case of Japan deflation remains entrenched; growth is much weaker than in East Asia. The reason for the disparity of growth lies in the disparity of productivity growth.

In East Asia the movement of people out of low- productivity agriculture into high-productivity manufacturing using the technology imported from advanced countries implies huge productivity growth. In advanced OECD countries productivity growth is dependent on innovation, a much slower process. So we observe a world in which productivity and so GDP growth is restrained generally by tight raw material supplies and in which the OECD countries growth relatively more slowly also. This adds up to a weak recovery in OECD countries, which is what we observe. The picture is not likely to change. It will take time for new technologies and discoveries to shift the shortage of raw materials; there are parallels here with the 1970s and 1980s when it took until the end of the 1980s to ease the acute shortages built up in the earlier decades. By 1990 for example oil per unit of real world GDP had roughly halved from the mid-1970s and oil prices fell to low levels. Nevertheless this does not mean that employment growth need be weak or unemployment remains high.

Labour market flexibility … i.e. real wages falling relative to general productivity and willingness to adopt new practices … can encourage substitution of more labour for capital and raw materials. This is most obvious in service industries where there is plenty of scope for higher labour-intensiveness. Furthermore, service industries themselves can grow faster when labour is more flexible.

So could this weakness turn into a double-dip recession in the OECD? It might seem so if growth there is restrained by tight raw materials and if also governments are pursuing fiscal tightening; the only way might seem to be downward pressure on growth. But this is to leave out the role of monetary policy. In the OECD inflation targeting has been the unsung hero of macro policy; inflation has stayed down in the recovery and deflation kept at bay during the 2009 recession.

The reason lies in the effectiveness of inflation targeting in anchoring expectations. Surprisingly also, many inflation expectations mirrored in wage settlements and bond yields have remained around the 2% mark, reflecting the inflation targets set by most OECD central banks or governments. But it should not be a surprise; the targets have reflected a popular change in overall policy, towards outlawing high and variable inflation. We had it, people did not like it, and policy changed to stop it during the 1980s or at latest by the early 1990s. In the debate over recession and public debt the idea that inflation should be used to tackle either problem has barely been discussed, let alone advocated in any serious way.

What this has meant is that monetary policy has been quite unhampered by the fear of inflation in its aim to keep recovery on track. With OECD banking systems mostly in difficulties credit growth has been held down  — in most countries it is hardly positive. So monetary policy has had to use unconventional means to encourage investment and consumption. Interest rates on official lending have been kept close to zero and central banks have aggressively bought financial assets from the public, with the effect that the yields on these assets have been reduced.

These purchase programmes have now been stopped. But if recovery looks threatened they can be restarted and will again have a powerful effect through these asset markets.

Two decades ago such programmes would have raised inflation expectations. Today they are given the benefit of the doubt. Some people argue that they are quite safe because bank credit and broad money therefore are hardly growing; however, one cannot be sure that other financial channels are not replacing banks while they are so weak.

The truth seems to be that firms and people who need finance are mostly able to obtain it on quite cheap terms, so banks are being bypassed to a substantial degree. But inflation is not expected to result because it is widely (and correctly) believed that if inflation were to start rising monetary policy would be tightened. This belief does free central banks to take aggressive action to prop up the economy if it falters. In short we think that the recovery will continue much along the current lines because from above it is held down by raw material shortages while from below it is held up by potentially aggressive monetary policy, with the power to more than offset the dampening from fiscal retrenchment.

Shaw Capital Management Korea: Portfolio Recommendations

We have made no changes in our portfolios this month.

The latest developments in the government debt

markets have increased the uncertainties about

prospects for both the bond and financial markets.

However, although the pace of the global economic

recovery may be affected, there appears to be enough

momentum to enable it to continue.

We have therefore maintained the level of our exposure

to the equity markets; and we have left 10% of the funds

in the portfolio in cash deposits as a contingency

measure. Bond exposure is zero.

Shaw Capital Management Korea: Portfolio

Recommendations - The UK Hung Parliament

The bond markets are totally calm about the hung

Parliament, as they are about both UK and US bond

prospects, with yields still below 4%, in spite of the

huge deficits both countries are running.

What is going on?

The first point is that both countries are recovering,

and seem set for growth rates in the 2–3% range.

Such growth is not ‘V-shaped’ but a V was unlikely

given the shortage of oil and raw materials, which

continues to limit world recovery potential. It does

give a prospect of improving tax revenues and falling

benefit expenditures.

As growth goes forward it will be possible to work out

more accurately how much of the current deficit is

‘structural’ — i.e. will not disappear with returning

growth.

For the UK the current estimate is that about 8% of

GDP is structural: still requiring a huge programme of

retrenchment.

The second point is that neither the UK nor the US has

ever formally defaulted in modern times.

Indeed for the UK, they can date this from the end of

the Napoleonic Wars when public debt reached around

300% of GDP.

The third point is the new unwillingness to use higher

inflation to bring down the debt in real value. Inflation

(implying an ‘inflation tax’ on government monetary

liabilities which thereby lose their value) is now

proscribed after the poor experiences of developed

countries during the ‘great inflation’ of the 1970s.

Electorates have rejoiced at the new inflation targeting

policies that have formally ended governments’

experiments with this form of taxation.

The electorates hated the messy and unintended

redistributions of wealth this tax implied — often from

the weak such as pensioners to the wealthy and the

unionized.

In this context bond markets have treated Mr. Obama’s

delays and the UK’s election result as simply policy

deferred.

In that they are likely to be right.

Shaw Capital Management Korea: Portfolio

Recommendations - The state of the eurozone

By contrast the situation in the euro-zone looks

increasingly difficult.

The problem is that Greece and Portugal — the two

main current problem cases — joined the euro in the

expectation that low interest rates would keep their

public finances under control.

Internally these countries have difficulty in raising

taxes and curbing expenditure but joining the EU and

then the euro gave them the authority to insist on fiscal

discipline as the ‘price’ of joining.

Now the discipline is becoming harsh and yet interest

rate premia are rising, as the risk of default increases.

Germany and the other euro-zone countries are

unwilling to transfer resources to them — and even to

provide loans on terms below these market rates.

Germany’s position in particular has hardened

massively under hostile home reactions to perceived

‘bail-out’.

Germany is simply unwilling to make transfers after

the huge costs of its integration policies for East

Germany.

There will come a point where the advantages of being

in the euro are outweighed by the disadvantages for a

country like Greece.

Once interest rate premia get high enough inside the

euro, the attraction of floating the currency down

outside it and still paying similar interest rates will

become overwhelming to governments faced with

public hostility to further sacrifice.

A large devaluation is a way of allowing the economy

to recover and produce extra revenue.

Furthermore reintroducing the local currency will

allow the government to re-denominate the debt in

that new sovereign currency … so effecting a de facto

partial default.

These exits would not spell the end of the euro. But

they will remind markets that the euro is bound

together by political convenience only and not by some

deep commitment to European integration.

Up to now there has been a general belief in such a

commitment; however, Germany’s recent actions have

destroyed this belief.

It was this belief that kept interest rate premia down

on sovereign debt of euro-zone countries; rather like

the debt of UK local authorities — formally underwritten

by the UK government, it was felt that these countries’

debt was being implicitly underwritten by other eurozone

members. No longer.

But of course what can happen to Greece could happen

to any other country. If so its risk premia too would

rise and it too would face the same trade-off between

staying in or exiting with the freedom to float at similar

interest rates outside.

Hence the chances of more break-up would get larger

and the system would become gradually closer to a

system of ‘fixed but adjustable’ exchange rates like the

old European Monetary System.

Shaw Capital Management Investment Financial Market Summary 2010

Financial Markets: Sentiment in the financial markets improved considerably over the past month. There was less concern about the possibility of a move into a “double-dip” recession; and fears about sovereign debt defaults also eased.

The improvement in conditions intensified the debate about the relative merits of austerity measures and further stimulus in the current situation, and revealed a significant difference in the approach of the Fed and the European Central Bank.

Equity Markets: Most of the equity markets recovered strongly from the falls that had occurred at the end of June, helped by some encouraging corporate results in the US, and the relaxation of tension about debt defaults in Europe.

Wall Street led the rally, and markets in Europe were able to follow the upward trend, with the strength of the German economy providing significant support. The best performance amongst the major markets occurred in the UK, as investors continued to react favourably to the proposed measures announced by the new UK government to reduce the huge fiscal deficit. The worst performance amongst the majors occurred in the Japanese market as economic and financial conditions in Japan continued to deteriorate. Government bond markets received some support during the past month from the easing of tensions in the sovereign debt markets in Europe. The recent “shock and awe” support operation agreed by member of the euro-zone, and the decision by the European Central Bank to buy the bonds of some of the weaker countries, has provided some reassurance for investors; but considerable uncertainties remain about prospects for the bond market.

The Fed is suggesting that further stimulatory measures might be necessary, whilst at the same time the ECB is warning that reductions in spending programmes and increases in taxes were now necessary, in Europe, but also elsewhere in the industrialised world. Movements in bond markets have therefore been fairly limited over the month.

Currency Markets: The feature of the currency markets has been the swing in sentiment. This has allowed the euro to rally strongly, helped also by the improving sentiment about sovereign debt defaults; and sterling has also moved higher after the announcement of measures to reduce the fiscal deficit in the UK and the more favourable economic news on the UK economy. The best performance; has been achieved by the yen, as its “safe haven” status has been further enhanced by the more serious problems elsewhere in the currency markets.

Short-Term Interest Rates: There have been no changes in short-term interest rates in the major financial markets over the past month.

Commodity markets have benefited from the general improvement in financial markets over the past month. Significant gains have occurred in base metal prices, and in the prices of wheat and coffee amongst the soft commodities.

Precious metal prices have fallen back, and oil prices are basically unchanged over the month after rallying strongly from recent lows.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target

Japanese Finance Minister Naoto Kan has recently exerted pressure

on the Bank of Japan (BOJ) to act more quickly to defeat deflation,

saying he wants the falling price trend to end this year. “Two or

three years is too long. If possible, I hope that the consumer price

index turns positive by the end of this year” Kan told a parliamentary

session.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. The finance minister also said that the BOJ may have to set an

inflation target aimed at dragging the economy out of grinding

deflation … a policy where a central bank declares a target for

inflation and guides actual price levels toward that goal through

monetary policy such as interest rate changes.

BOJ Governor Masaaki Shirakawa made it clear he had no intention

of taking such a step, and explained in detail why he considers it

inappropriate. “There is a mood to reconsider the use of the

framework of inflation targeting following the recent financial

crisis," Mr. Shirakawa said at a recent news conference.

“If a central bank concentrates only on achieving a short-term

price goal, that could have an adverse effect on sustainable economic

growth, which is the final goal of monetary policy”, Shirakawa said.

Moreover, “such a mechanism would reduce the BOJ’s flexibility

on policy”.

Inflation targeting has become a favoured policy among many

central banks worldwide, but since the start of Japan’s deflationary

era in 1999, the BOJ has stoutly resisted calls to set an inflation

target against which it can be judged, and by which it can be

embarrassed if it misses it.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. Instead it has relied on softer price guidance in determining policy.

Its inflation objective is defined in the loosest terms, as a rate

between zero and 2% for the core consumer price index, as one

that meets its “understanding of medium- to long-term price

stability”, with no time-frame to achieve it and no penalty for

failure.

Still, core consumer price index, which excludes volatile fresh food

prices, fell 1.3% on year in December, dropping for the 10th straight

month.

Shirakawa’s comments suggest the central bank will not embark

on any further easing for now to put a stop to deflation. However

the BOJ might be forced to loosen policy toward the middle of the

year if the domestic economy loses momentum from its recent

strong performance … recent data showed the economy grew at a

4.6% annualized pace in the final quarter of 2009.

And with a key upper house election coming up in the summer, at

which the ruling Democratic Party of Japan hopes to win a majority

in the chamber, political pressure on the BOJ to do more to improve

the economic picture could rise.

Can the introduction of inflation targeting under deflation and

zero interest rates contribute to the Japanese economic recovery?

Generally, inflation targeting has been increasingly viewed as a

good monetary policy framework and widely applauded by

economists and policymakers.

In the literature, there are benefits of inflation targeting for both

inflation and output behaviour.

Inflation targeting should stabilise the level of inflation, reduce its

variability and persistence, and also decrease the variability of

output.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. A recent study by Daniel Leigh, an economist at the IMF, shows

that had Japan introduced an inflation target in the 90’s its

economy’s performance would have substantially improved and

the BOJ would have avoided the zero lower bound on nominal

interest rates.

But the essence of the question is to what extent the introduction

of inflation targeting will enhance credibility of the BOJ’s reflation

policy in a deflationary phase and help economic recovery.

More importantly, whether or not the BOJ monetary policy is

credible enough for inflation expectations to be anchored to an

inflation target.

Takehiro Sato of Morgan Stanley says that, unlike the Federal

Reserve, which has won a high degree of respect for its handling

of monetary policy, Japan’s central bank is not yet trusted by

markets because of its past moves. “The BOJ’s policy track record

is bad.

A target for inflation helps to anchor future expectations of

monetary policy, but BOJ lacks credibility.

The mere announcement of an inflation target would not change

expectations”, he said.

Indeed, the introduction of inflation targets among advanced

countries tends to be accompanied by an institutional framework

that makes inflation targeting credible and accountable.

In several countries, including New Zealand and Australia, inflation

targeting is an agreement between the government and the central

bank, and both are committed to policy that is consistent with the

inflation target.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. In several countries, including New Zealand and the UK, when

inflation exceeds the target by a wide margin, the Governor is

required to provide an explanation to the parliament. With

accountability and commitment, inflation targeting does become

credible.

A central bank in a deflationary environment

is subject to a time-inconsistency problem: it

cannot credibly commit to “being

irresponsible” and so continue to shoot for

high inflation.

Furthermore, there is a concern that once the Japanese economy

has emerged from a deflationary spiral and starts to recover, the

central bank will be tempted to renege on its commitment to a

high inflation target, because it would like the economy to return

to an inflation rate consistent with price stability.

Thus a central bank in a deflationary environment is subject to a

time-inconsistency problem: it cannot credibly commit to “being

irresponsible” and so continue to shoot for high inflation.

The result of the time-inconsistency problem is that the markets

would not be convinced that inflation would remain high, and

inflation expectations would not be high enough to lower real rates

sufficiently to stimulate the economy out of the deflation trap.

To overcome deflation and restore economic activity Japanese

policymakers may not need to adopt an inflation target.

They could simply use unconventional instruments, such as

purchases of riskier assets and foreign assets, more aggressively

so to persuade the markets and the public that there will be higher

inflation.