It was only a question of time before Japan joined in the currency race to the bottom. It could not stand by and do nothing whilst it watched the US Federal Reserve, the European Central Bank and the Bank of England pump unprecedented quantities of money into their respective economies. So now, it has joined in the money-printing game to drive down the value of the yen, drive up inflation and lift asset prices.
There are signs that Japan’s decision to pump up to 60 trillion yen a year into its economy is working. The yen is down to a four-year low against the US dollar and Tokyo shares are at their highest for more than 4-1/2 years. It might be too early to gauge the impact of its strategy on inflation but a lower yen could boost the cost of imports. So, it is not inconceivable that inflation could pick up, which is the desired intention of the BoJ.
The problem with inflation is that it is very difficult to create just a bit of it. If the Bank of Japan’s “steroid strategy” works, and there is little reason to suggest that it won’t, inflation could eventually take off. Unfortunately, it is not easy to contain rising prices within national boundaries especially with an economy as large as Japan’s. In time, Japan’s inflation could be our inflation too, which is why it is important to look to inflation beating assets such as shares now.
In particular, it is important to look to companies that have pricing power or the ability to raise prices. Economists say these companies’ products and services are inelastic. I just call it looking for companies that can increase prices without lessening the demand for the product. Examples of Singapore companies with pricing in power include Genting Singapore (SGX: G13), Thai Beverage (SGX: Y92) and Star Hub (SGX: CC3). If you think about it, inflation is unlikely to deter punters from gambling, drinkers from imbibing and viewers from watching their favourite programmes on TV.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.