But there is increasing evidence that inflation expectations are becoming more firmly established. Beyond the break-even inflation rates, survey data confirms households are expecting inflation. Iwata stated that 83% of respondents to a Bank of Japan survey expected prices to go up one year from now.2
Iwata further stated that the rise in inflation expectations should manifest in shifting portfolio allocations from cash, which earns 0% interest rate and potentially suffers from declines in purchasing power, toward foreign assets and equities. And the portfolio flow data is starting to bear out this shift in allocations. Iwata illustrated the occurring shifts:
According to recent statistics, the financial assets of households at end-June 2013 increased by 5% on a year-on-year basis. Looking at this in detail, while bonds decreased by 9%, shares and equities increased by 31% and investment trusts rose by 29%. The portfolio rebalancing … is actually taking place.3
Japanese Household Assets (as of 6/30/2013)