BoJ introduces de facto inflation target

At its Monetary Policy Meeting on 14 February, the BoJ's Policy Board decided to carry out additional monetary easing, and clear price goal for the rate of increase in the CPI of 1%, thereby introducing a de facto inflation target. We view this as positive for the construction, housing, real estate, and J - REIT sectors.

This is because the large rises in the stock market and real estate prices from 2003 to 2007 was the result of the direction of the CPI having turned from negative to positive, leading to expectations that the economy had emerged from deflation. With the monetary easing that is currently in place, the direction of the CPI has already recovered to close to 0% YoY. We believe large increases in stock prices and real estate prices can be expected if the direction of the CPI moves into positive territory as a result of this inflation target.

As shown in the figure, because real estate is a type of good, real estate price movements conform to movements in the CPI. The impact differs, however. Put simply, we believe a 1% rise in the CPI would have the effect of boosting land prices in the six major cities by 10%. We maintain our overweight view on the construction, real estate, and J - REIT sectors. CPI and Land Price Index.

Eoin Treacy's view Japan's property sector has been in the doldrums for decades but it offers attractive yields in a domestic environment where globally competitive pay outs are rare. The TSE REIT Index has a yield of 5.95% and has held a progression of higher reaction lows since posting an upside weekly key reversal in December. A sustained move below 850 would now be required to question potential for some additional upside.

The Yen weakened further today against the US Dollar. The rate has spent more time above the ¥78 level this week than any time since July. The Dollar needs to hold the advance in order to suggest more than temporary relative strength.