The strong yen has been hurting Japan's export economy for several years and, in terms of purchasing power, the yen is overvalued against both the euro and the dollar, as illustrated in the chart above. Recently, the Bank of Japan increased its rhetoric about setting a positive inflation target after 13 years of deflation. We will judge Japan by its actions and not its words, but we think a 20% decline in the yen would be a significant boost for Japan's manufacturing sector, as well as its whole economy. Such a decline would require much more determination from Japan's policymakers than seen in the past. While the yen has started weakening on that hope, we need further evidence of currency depreciation and higher prices before we add exposure.

David Fuller's view They are right to be cautious, at least regarding the BoJ's intentions. The central bank has long opposed those policymakers who favour a weaker currency (weekly & daily) but relented last month in response to a further hollowing out of Japanese manufacturing in Japan.

The weaker yen has helped to fuel Japan's participation in this year's global stock market rally. Although Japanese equities also face a short-term susceptibility to some reaction and consolidation in response to a temporary overbought condition, we continue to like the technical evidence of medium-term recovery scope, which is occurring from a very depressed level. Provided that the BoJ really has undergone a conversion on the road to Damascus, we think that Japanese equities are also experiencing a cyclical bull trend.

(See also Eoin's comments on Japanese bank shares below - very important.)