Hitting 2 per cent would be quite an achievement. Japan's price level has been stagnant or falling for many years; inflation is currently minus 0.1 per cent. So even the sniff of a serious attempt to reverse the country's drifting deflation has revived the spirits of investors far and wide. The big questions now are:
■ will monetary stimulus really help massage prices and get the economic parts moving?
■ will that be enough to prompt a major upwards shift in Japanese share prices that UK investors ought to follow?
Of course, an investor does not need a definite 'yes' to either question to raise his exposure to Japan. Just a fair chance that Japan's economic decline will be arrested would be enough. Perhaps not even that. After all, for equities hope is often the key. So the willingness of investors to believe that a corner is soon to be turned could keep share prices rising for months, even years. The question has a practical application because it's so easy for UK investors to get exposure to Japanese equities. There are at least 24 exchange traded funds that track Japanese share indices (usually the MSCI Japan index); a ridiculous number of closed-end funds (well over 500) that invest in Japan and 10 specialist investment trusts (seven of which focus on small- and medium-sized companies).
But the decision whether to invest depends on the outcome - or the perceived outcome - of what we can caricature as the struggle between the resolve of Mr Abe and his new men at the Bank of Japan and Japan's demographics.
As to Mr Abe's resolve, that can't be relied on. This is the 58-year-old's second chance as prime minister - a rarity in Japan - and he badly messed up his first chance. Since then he has been dogged by ulcerative colitis, which by itself is enough to test anyone's resilience.
Nor is his appointee as the central bank's governor, Haruhiko Kuroda, necessarily as innovative as has been portrayed. Mr Kuroda is a career banker who says the central bank has lots of monetary tools at its disposal. It doesn't really. All any central bank can do is mess around with the cost of and quantity of money, but his remarks have prompted speculation that the bank will repeat what it - unsuccessfully - tried 12 years ago: so-called 'helicopter drops' of money (basically, an extreme form of quantitative easing) to get the economy stirring. However, Mr Kuroda is fronting an organisation that - like most central banks - has an inbuilt resistance to change. And, in one respect at least, he exemplifies what's wrong with Japan - at 67, he is old.
Japan's demographics are frightening. Back in 1950 it had a working-age population of 50m. In 1995, that number had reached 87m, as a growing workforce backed by lots of capital fuelled Japan's transformation. But that figure was the peak. By 2050, the working-age population will be back to 50m; except that, second time around, there will be a major difference: workers will have a nation of old - really old - people to support.
Already this is causing big problems. Having fewer workers means Japan can only grow by increased productivity, but that is constrained by companies' reluctance to invest because domestic demand declines with age. Except for healthcare costs, which are mostly state funded anyway, the really old don't drive much spending. Even Japan's power companies complain that demand for electricity is fading because the old go to bed early.
Nor do the elderly save. However, this has an insidious side-effect. Because they rely on their savings, the old actually prefer deflation. The more that prices fall, the more their wealth is sustained in real terms.
That may mean Japan fosters an inbuilt preference for deflation, whose justification runs something like this: "We (the Japanese) still have a wonderfully rich country with per capita national income of £31,000 and unemployment of only 4.2 per cent of the work force (the UK's figures are £26,000 and 7.8 per cent), so surely it does not matter much if output marks time and prices fall?"
Maybe not for another 20 years or so. Which is why it remains hard to back Japanese equities for the really long haul. Over the next couple of years, however, aggressive monetary easing, forcing down the exchange rate and perhaps prompting a little more internal demand plus some inflation provides a great backdrop for share prices. Sure, some of the gains would be surrendered by currency losses (though that can be hedged), but it's tempting to back this scenario with a little capital from the Bearbull Global Fund.
