A prolonged period of inflation is expected, making a decline in purchasing power unavoidable for those holding only cash and deposits. Based on multiple statistics and case studies, it is explained that diversified investment incorporating foreign equities and foreign REITs is effective as an inflation hedge.
Inflation can be short-term or long-term. Short-term inflation is attributed to the effects of yen depreciation, while long-term inflation is explained as price increases accompanying economic growth. The Bank of Japan's inflation target is 2% per year, and if this is achieved, the likelihood of a long-term decline in purchasing power will increase.
As a long-term inflation hedge, the ACWI all-country world equity index has significantly outperformed over the past 33 years on a purchasing-power basis, indicating a stronger return component than cash or time deposits. Cash loses purchasing power, while time deposits only marginally outperform the CPI.
Equities and real estate are assets that generate value over the long term. Equities tend to increase in value through companies' earnings generation, while real estate tends to appreciate through long-term rental income. Although market conditions may cause repeated temporary declines and increases, rising asset values are often reflected in prices over the long term.
Foreign equities and foreign REITs are considered versatile assets for hedging inflation. Because they combine the characteristics of foreign-currency-denominated assets and assets that generate added value, holding an all-country world equity index is proposed as a practical option. Gold has a certain effect, but is generally considered less advantageous than equities and real estate over the long term. Many views put the upper limit for gold at around 10% of a portfolio.