"In Martin Spring's letter that you posted Friday, on the very last page, is a small item entitled "Kabutocho replay?" In it Peter Tasker, of Arcus Research suggests that one of the best places to invest in an inflationary world is Japan. Can you walk us through the logic of that, to the best of your understanding?

"Thanks, and have a wonderful holiday season."

David Fuller's view Thanks for your good wishes, which we return.

Regarding Japan, I assume Peter Tasker's view is due to the economy being mired in a mild deflation for much of the last two decades. If that continued, interest rates would obviously stay low, while they rose in other countries where inflationary pressures were increasing.

I have not been to Japan since 1989, so I am very out of touch. However my distinct impression was that unless one ate in noodle bars, food was very expensive; surprisingly so for fresh fruit.

What about Japan's monetary policy and the recent improvement in its stock market?

Before I tackle my own question, I would welcome any feedback on the email question above from subscribers who either live in Japan or are frequent visitors.

The recent improved performance by Japan's stock market can be seen on its major indices such as the Nikkei,commencing with a weekly upside key reversal, Topix (note also weekly upside key near 800k the site of earlier upward dynamics), Second Section and Banks Index.

For this to be an instance of Lazarus rising rather than another sucker rally, we will need to see a much better performance by Japanese banks. However every journey starts with a single step and I would not rule out the possibility of continued strength, for at least the medium term.

There is a technical factor: In a global bull market even the serial underperformers eventually looks attractive if only because everything else has already performed. Meanwhile, Japanese equities are back in play.

For this rebound to endure, I maintain that we will need to see an aggressive monetary policy. There has been talk of this by Japanese monetary officials and some tentative evidence in the yen's somewhat weaker performance against the US dollar (JPY/USD) in recent weeks. The yen needs to break its overall upward trend, I maintain, which would boost export earnings at a time when they should be rising due to regional economic strength.

Another hint of a more aggressive reflation is the recent sharp sell-off in JGBs and corresponding rise in Japan's 10-year Bond Yields. This too will need to carry considerably higher over the medium term, in my view, if Japan is to see a really impressive stock market recovery in 2011.