To: TobagoJack who wrote (5778 ) 7/11/2001 3:04:54 PM From: Maurice Winn Respond to <In short, the impact of falling inflation prompted enormous capital gains for investors as nominal equity and bond yields declined. But now that the world has reached an era of low inflation, the gains from market rerating are likely to disappear. > wws.princeton.edu ...Japan's fundamental currency problem is not an excessively weak yen but a yen that, absent a commitment to inflation, tends to be too strong to effect the necessary export of capital; certainly the recent runup in the yen makes that position more comprehensible. The actual prospect of bank recapitalization also makes it much clearer than before that fixing the banks, while necessary on its own merits, is unlikely to do much to solve the economy's macroeconomic problems. And recent headlines about both the size of Japan's prospective budget deficit and the decision of Moody's to downgrade Japanese bonds suggest that the limits to fiscal policy, if they have not already been reached, will be reached soon. So the time seems ripe for a restatement of the argument that what Japan needs is moderate, "managed" inflation. >Assuming ratings can hold at current levels (they are high by historical standards), returns from equities will now be more closely linked to profits growth. Profits growth in turn is likely to be linked to nominal GDP growth, which has been running at about 5-6 per cent in the developed world. That means investors can expect equity returns only in the single digits. >
