Like many a guest arriving late at a drinks function, there's a natural inclination to make up for lost time. And so it is with the Bank of Japan, which joined the global reflation party in early April, with plans to unleash a torrent of liquidity designed to wash away decades of economic underperformance.
The impact of Japanese Prime Minister Shinzo Abe and Bank of Japan governor Haruhiko Kuroda's revolutionary new growth strategy has been little short of jaw-dropping. In just six short months, Japan's new administration has reversed decades of political infighting, policy inertia and entrenched market scepticism, sending the stock market soaring.
In the first three months of 2013, Japan's benchmark Topix index rallied a staggering 20 per cent in local terms. You'd have to go all the way back to the heady days of the late 1980s to see a better quarterly performance.
There are a few twists to the Abe programme. For example, the country's inflation target has been raised from 1 per cent to 2 per cent. The Bank of Japan aims to expand the money supply to - hopefully - turn around decades of deflation and economic stagnation. Kuroda says it will boost the size of its monetary base by up to 70 trillion yen (HK$5.5 trillion) annually.
In other words, a fairly standard reflation strategy. But what differentiates this package from others can be summed up in a single word: intent. With a prime minister and a central bank governor agreeing on policy for the first time in a long time, it appears Japan is serious.
The market expected the Bank of Japan to announce monthly purchases of Japanese government bonds worth 5.2 trillion yen as part of the new package; instead governor Kuroda delivered 7 trillion yen. As a measure of its surprise, the Topix index shot up almost 11 per cent in the four days that followed.
Seasoned Japan-watchers have viewed the dynamism of the government's growth initiatives with a mix of disbelief and concern. Heavyweight investors such as Bill Gross and George Soros have warned that the programme threatens to radically weaken the yen, resulting in an "avalanche" (Soros's words) of money coming out of Japan, seeking higher returns in more stable currencies abroad.
The greatest threat to Kuroda's plan, they argue, comes not from whether he is able to achieve his 2 per cent inflation target, but whether he can keep a lid on government bond yields. Given that Japan's 10-year bonds yield about 0.5 per cent, that could be a much harder task than Kuroda imagines.
The last time Japanese government bond yields were at similar levels was in July 2003. Then, Japan's newly capitalised banks bought bucketloads of the "risk-free" paper. Bond prices rose but, in an ensuing rush to lock in profits, the banks all sold their bond holdings at the same time and prices tanked. That produced a huge jump in Japanese government bond yields, which tripled in three months.
Kuroda is asking Japanese banks to hold onto some 250 trillion yen worth of government bonds at a time when he is reaching for the stars on inflation.
Even if he gets even halfway to his 2 per cent inflation target, the likes of Soros and Gross question the incentive for Japanese banks to hold their bonds at a nominal yield of 0.5 per cent.
Of course, in 2003 the Bank of Japan was infinitely smaller than Kuroda's behemoth today. Thus, Kuroda can mitigate a yield spike in government bonds by simply boosting his asset purchases to match selling by banks. Admittedly, that carries a longer term cost for the central bank, but it should present no problems for at least the next two years.
Kuroda could also come to some arrangement with the banks about an orderly exit from their holdings of Japan government bonds that prevent yields from spiking. Now doubt he has analysed what happened in 2003 and will want to prevent another price collapse in the security.
So what should we do? Is now the time to buy, sell or hold Japanese equities? Should we side with the sceptics or jump in with the bulls? Well, there's no point fighting the Bank of Japan when it is in full reflationary mode, willing to exceed market expectations.
Analysts are of the view that, if Kuroda's 2 per cent target is indeed reached, the yen could depreciate a further 10-15 per cent and the Topix could rise by a further 15-20 per cent. For those with a long-term, multi-year investment horizon, now is as good a time as any to accumulate Japanese equities.
John Woods is the chief investment strategist, Asia-Pacific, for Citi Private Bank