Commentators are routinely scared by the deflation - and they endlessly chorus headline gross government debt - some 200% of GDP.

This incurious view needs more examination than just knee jerk reaction.

1) As a general reality, in the first instance the economic "lost generation" didn't actually happen. In real, deflation-adjusted terms GDP has shown annualised growth of 1%±. A GDP figure alone is, as you know, meaningless, unless it is also population adjusted. Japan has had a declining population for some time (0.6% p.a.). Further, for what it is worth, just as I believe US inflation is understated I have seen it suggested that Japanese deflation is understated. Possibly by 1% or more. In reality, one could thus be looking at real GDP per head growth of nearer 3% per annum. Japanese GDP, real per head, exceeded that of the USA this century up until the tsunami. US GDP per head, adjusted for inflation, may well be negative over many years back. Certainly, if you believe, as many do, that the underlying statistics that make up the GDP figure need substantial negative adjustments (recent bulletins).

David Fuller's view Fullermoney is privileged to post some fine reports but this is certainly one of the most interesting and informative that I have seen recently. It is also controversial, albeit intelligently so in my opinion, so it should appeal to contrarians.

Here is one of several controversial sections:

The endless balance of payments surplus underpins the currency - though the merchandise trade surplus, following the tsunami, turned into a deficit. This has measurably improved recently. Capital Economics show that the Yen, inflation/deflation, adjusted has stayed about static versus the US Dollar since the end of the 1980s. I do not understand the endless chorus "the Yen must fall". Surely, only if the payments surplus turns into a sustained deficit. But it hasn't.

I have long maintained that a weaker yen was a necessary catalyst for a significant recovery by the Japanese stock market, and have referred to this as Waiting for Godot, on several occasions. I take Peter Bennett's point about the payments surplus as evidence to the contrary. Nevertheless, Japanese exporters have repeatedly cited the strong yen as a headwind for corporate profits. It has also forced them to move production offshore, which cannot be to the long-term benefit of Japan's economy.


Peter Bennett goes on to say that there should soon be a huge improvement in Japan's stock market performance. He backs this up with five impressive fundamental valuation points which you can see in the latter portion of his report.

I find them persuasive but it will not happen, in my opinion, until foreign investors and particularly the Japanese themselves increase their weighting in Japan's stock market. The proverbial Mrs Watanabe has mostly shunned equities since the bubble burst in 1989.

Japan's Nikkei (historic, weekly & daily) and Topix (historic, weekly & daily) indices remain long-term recovery candidates. Judging from previous recoveries, Japan's Second Section (historic, weekly & daily) and Topix Banks Index (historic, weekly & daily) should be lead indicators. Watch for eventual breaks above the June-July highs for reaffirming evidence of uptrends.