Mizuho Financial Group Inc. (ADR) (NYSE:MFG) (TYO:8411) in todays report titled ‘Expectations for great rotation versus bubble warnings’, predicts that the Japanese and American central banks’ highly accommodative monetary policy will continue to accentuate risk taking.

Mizuho Financial Great Rotation

The impact of Bank of Japan’s quantitative and qualitative easing announcement on April 4 is expected to be felt much beyond Japan. In Mizuho Financial Group Inc. (ADR) (NYSE:MFG) (TYO:8411)’s opinion, the monetary policy easing will provide sufficient time to prevail the concerns over Europe and the US fiscal cliff. Besides the outflow from US stock, mutual funds observed from September 2011 has ended with steady net inflow into these funds since the second week of January. Japan too, has seen net inflow into equities since the middle of January.

The report also predicts that global investors are confident that central bankers in the US and Europe will not rush to implement an exit strategy after the recent developments in Cyprus. Even in the US, the concerns about an exit strategy from monetary policy easing abated when March employment figures and retail sales came in below expectations. Hence, Mizuho Financial Group Inc. (ADR) (NYSE:MFG) (TYO:8411) feels there will be continuation of QE 3.5 despite some support for its discontinuation from some quarters.

There are unnecessary concerns that Bank of Japan’s monetary policy easing would force Japanese financial institutions to shift or rotate to foreign bonds. This concern has been nullified by the first and second week of April data from MoF confirming actual net selling of foreign bonds.

However, Mizuho Financial Group Inc. (ADR) (NYSE:MFG) (TYO:8411) predicts volatility in forex markets driven by speculators to persist against the backdrop of Bank of Japan’s policy easing announcement. Further emerging economies have criticized monetary policy easing by the advanced economies and responded by intervening in the forex market by buying dollars and selling their own currencies. This is likely to spread the impact of US-led monetary policy easing globally.

US stock mutual funds have seen net inflow of funds for 13 consecutive weeks since the second week of January 2013. While the scale does not yet justify the ‘great rotation’ description, this development could signal a change in money flows, which had focused towards safety for the last two years.

Besides the continuous flow of funds from safe assets to equity, mutual funds could bridge the gap between higher bond yields and lower stock dividend yields. During March 2013, Japan too experienced net inflow into stock investment trusts.

Inflow into Sales Asset Chart

Lastly, Mizuho Financial Group Inc. (ADR) (NYSE:MFG) (TYO:8411) notes that they are also beginning to hear some clear warnings that a bubble may be forming in Japan. Yukio Noguchi, an advisor at Waseda University Graduate School of Finance, Accounting and Law gets credit for predicting Japan’s financial bubble during 1987.

Recently, he stated that it would be irrational for share prices to be rising without reason, though self-fulfilling re-pricing of stocks is reasonable if inflation expectations change.