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Japan will continue to provide monetary stimulus in order to combat deflation. Speaking at Jackson Hole last Saturday, Bank of Japan (BoJ) governor Haruhiko Kuroda said monetary easing would continue for “some time” until deflation was tackled conclusively.

Kuroda-Speak

Kuroda said that the current policy to tackle deflation utilizing easy monetary policy had met with success. Speaking on the sidelines of the global central banking conference, he said large-scale asset purchases would continue.

However, Kuroda admitted that Japan remained doubtful about whether the BoJ would be able to meet its inflation target of 2%. The need to create expectations that prices will rise is crucial because it would lead industry to increase wages. This is an important step in Japan’s struggle with deflation in the long term, Kuroda said.

Rise in Consumer Prices

The BoJ first introduced monetary stimulus measures in April last year. The central bank promised to expand its monetary base using asset purchases as part of a quantitative easing program. Kuroda aims to increase consumer inflation to 2% within a two-year timeframe. This is crucial for the economy’s health in the long term given the fact that the country had faced 15 long years of deflation.

When first introduced, monetary stimulus measures were particularly effective. In April, Japan raised its consumption tax from 5% to 8%, the first such increase in 17 years. The Bank of Japan estimates that this hike contributed 2 percentage points to May’s core inflation. Excluding the effect the consumption tax, consumer inflation increased 1.3%.

Kuroda had then acknowledged that inflation would decline over the next few months, wearing out the impact of the consumption tax hike. As the impact of a weak yen on the cost of imports declines, inflation is expected to dip in the months ahead.

Wage Increases Elusive

However, an increase in wages is key to the economy’s well-being in the long term. Kuroda said: “Some kind of mechanism, a ‘visible’ hand, is necessary for wages to rise.” Aggressive monetary stimulus is possibly the important method being used to affect an increase in wages.

This particularly significant because growth in income is failing to keep up with inflation. Average overall monthly earnings increased 0.4% in June on a yearly basis, compared to a 0.6% increase in May. Excluding fresh food, consumer prices increased 3.3% on a year-over-year basis in June. Kuroda’s statement that monetary easing would continue probably relates to the fact that a desired increase in wages has not been achieved up to now.

At the same time, Kuroda said the Japanese economy was continuing to improve. Stimulus measures were having a noticeable impact on economic conditions. Labor market conditions were getting better and investment was on the rise.

Our Choices

There is evidence to bear out the fact that the economy has benefited as a result of monetary easing. Moreover, the central bank is determined to continue stimulus measures till it achieves its targets. Below we present three such stocks, each of which also has a good Zacks Rank.

Canon Inc. (CAJ - Snapshot Report) is an industry leader in professional and consumer imaging equipment and information systems. The company operates through three business divisions. Its office segment offers products such as copiers, complex machines and printers.

The industrial equipment segment develops, manufactures and sells semiconductor, micrographics and optical disk filing systems.  Canon’s imaging systems offers products such as digital cameras, lenses and broadcasting equipment.

Canon holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.

Toyota Motor Corp. (TM - Analyst Report) has three business divisions: automobiles, finance and another segment focusing on housing, information and communications. The company recorded earnings of ¥185.34 per share ($3.64 per ADR) in first-quarter fiscal 2015 (ending Jun 30, 2014), beating ¥177.32 per share ($3.58 per ADR) in first-quarter fiscal 2014 (ending Jun 30, 2013).

Earnings per ADR surpassed the Zacks Consensus Estimate of $3.07. The Japanese automaker posted consolidated net income of ¥587.8 billion ($5.76 billion) for first-quarter fiscal 2015, improving from ¥562.2 billion ($5.68 billion) in the year-ago quarter.

The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 6.4%. It has a P/E (F1) of 9.47.

Nidec Corp. (NJ - Snapshot Report) and its subsidiaries are primarily engaged in the design, development, manufacturing and marketing of small precision motors, mid-size motors as well as machinery and power supplies. Nidec also produces other products, which include auto parts, pivot assemblies and encoders.

The company’s manufacturing operations are located primarily in Asia and Nidec has sales subsidiaries in Asia, North America and Europe. It also has manufacturing locations in Thailand, China, Singapore, Indonesia and Vietnam.

Apart from a Zacks Rank #2 (Buy), Nidec has expected earnings growth of 48.9%. It has a P/E (F1) of 22.79.

The BoJ governor has emphasized that monetary easing will continue until economic targets are met. This is good news for the economy and will encourage further investment, resulting in the targeted increase in wages. This is why these three stocks are good choices for your portfolio.

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