After the BoJ proposals were made public, the Nikkei 225 rallied above the 13,000 mark in a Pavlovian response to government stimulus. But it is important to remember that Japan's declining population rates and reductions in industrial output over the last 20 years create limitations for the potential increases government stimulus can generate in nominal GDP growth.

While we might see some short-term improvements, the longer-term picture remains weak. The wider climate favors selling rallies in the broader indices like the Nikkei 225. Alternatively, investors should consider currency investments as the "carry trade" will likely generate increasing market buzz as the year progresses. With interest rates in U.S. currency holding at all-time lows, other options can be found in traditional high yielders, such as the Australian dollar.

Interest rates are 3% in Australia (nearly all of which will be captured when funding long AUD/JPY positions in yen). Fundamental support for these investments comes from the Australia's strong labor markets and rising inflation forecasts (which suggest that interest rates will need to be raised in the third or fourth quarter). Higher interest rates create bullish scenarios for currencies, allowing investors to reap gains in both interest rates and valuation changes. Overall, the scenario favors an avoidance of Japanese assets as the fundamental picture supports purchases made in currencies with superior interest rate potential.

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At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Cox is a university teacher in international trade and finance. His articles appear on a variety of Web sites, including Seeking Alpha,, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock, currencies and commodities). Trade ideas are generally based on time horizons of one to six months.

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