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Japan's Economy Awakens: Stocks Soar as BOJ Readies for Policy Shift


Lauren Miller

March 14, 2024 - 23:47 pm


Japan's Financial Renaissance: Stock Surges and Bond Bears Amid Monetary Policy Shift

As anticipation builds ahead of a pivotal meeting of the Bank of Japan, investors worldwide are poised for potential strategic shifts. With the Japanese stock market near historic highs, soaring bond yields, and the weak yen boosting export-oriented companies, all eyes are on the potential end of the world's last dalliance with negative interest rates.

Japanese Stocks and Yields Sources: Japan Exchange Group, Bloomberg

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Rally in Equities Amidst Economic Resurgence

In an era where negative interest rates could be approaching their denouement, market heavyweights like BlackRock Inc. and Man Group Plc. have cast an optimistic projection on Japanese equities, propelled by revitalized economic vigor. Meanwhile, RBC BlueBay Asset Management is doubling down on selling short 10-year government bonds, suggesting a strong macro strategy. Investment firms abrdn plc and Robeco have not shied away from this optimistic trend, placing confident bets on the rising yen.

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Yue Bamba, the mastermind behind BlackRock's Japan active investments, envisaged that the Bank of Japan's incremental approach to raising rates would nurture a conducive environment for stocks to flourish. She believes in the multiplicity and sustainability of growth vectors, suggesting that market pricing still has a considerable way to go before it reflects the evolving economic landscape fully.

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Prognostications on Monetary Policy and Capital Influx

As billions of dollars have cascaded into the Japanese markets over the prior year, future capital movements will inevitably hinge on the Bank of Japan's monetary policy trajectories. Current market indications via overnight-indexed swaps hint at a rise in the BOJ's short-term policy rate to approximately 0.25% by late 2024 from the current minus 0.1%.

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Diverse Strategies in Equity Investments

The Nikkei 225 experienced a groundbreaking milestone earlier this month, surpassing the 40,000 mark. Despite this index’s rally encountering a momentary pause, investor sentiment has not waned but rather shifted towards more precise stock selection strategies.

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"We're investing more in insurers than banks as we prefer the higher risk-reward and recent governance reforms," declared Michiko Sakai, a strategically positioned portfolio manager at JPMorgan Asset Management in Tokyo. She postulated that further rate hikes by the BOJ, along with robust economic growth, could propel banking stocks upward significantly.

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December 2022 marked a game-changing moment for the financial sector when the BOJ unexpectedly modified its yield-curve-control policy, setting off a staggering 75% surge in a Topix-indexed bank gauge. As the monetary policy moves towards normalization, lender profitability is looking up following years of suppression by extremely low interest rates.

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Man GLG has ingeniously recalibrated its exposure, reducing banking stocks that have seen a substantial rally over a year and a half, yet its positioning remains decidedly ahead of the sector’s weight in the Topix Index, as revealed by Emily Badger, a seasoned money manager with Man Group.

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"We are exposed to more contrarian opportunities within the bank sector," Badger stated. "Real estate and the railways continue to trade at a discount and remain of interest to the team."

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BlackRock, diverging in its approach, opts for a more inclusive bet on Japan's equity markets, with a conviction that sectors from technology to construction and lending will all share in the prosperity.

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Bearish Views on Government Bonds

On the flip side of the bullish sentiment in equities lies the Japanese government bond market, which appears ripe for selling. The benchmark 10-year yield has climbed more than 15 basis points this year, currently trading at around 0.78%.

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UBS Asset Management and Schroders Plc were some of the early players to adopt bearish stances, engaging in the risky "widow-maker" trade even prior to the BOJ's policy adjustment. Today, RBC BlueBay, among others, ventures into shorting 10-year JGBs with the rationale that yields could crest above 1.25% by year-end.

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"This is the largest macro-risk position we are currently running as it offers the best risk-rewards," Mark Dowding, RBC BlueBay's chief investment officer, expressed. He leverages futures and yen swap instruments to articulate his positions.

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Abrdn stands alongside with underweight positions in JGBs within its global government bond strategies, anticipating further hikes in the near future.

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"Ahead of the first rate increase, we anticipate the BOJ will emphasize the continuation of an accommodative policy; however, we foresee a compelling situation leading to an additional rate hike as early as the third quarter, causing the policy rate to ascend to 0.25%," addressed Aaron Rock, head of nominal rates at abrdn. The fund speculates a higher probability of the BOJ moving past negative interest rates come April.

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Renewed Vigor for the Japanese Yen

Japan's considerable interest rate differential with the US and European nations has rendered shorting the yen a prevalent macroeconomic strategy. Nonetheless, the winds of change are beginning to stir.

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Schroder Investment Management has tweaked portfolio allocations to capitalize on the yen's anticipated ascent, and strategy experts at JPMorgan Chase & Co. have recently ventured into a long spot yen position versus the euro.

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"We expect the tightening of monetary policy to usher in a period of yen fortitude, with potential appreciation against major currencies forecasted to hover around 8 to 10% over the next year," predicted Aaron Rock of abrdn, who has placed bullish yen trades against the pound and the euro.

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The yen's depreciation against the dollar by roughly 5% to a level around 148 has pegged it not far from a 30-year nadir reached in October 2022. The devalued yen has been an attractive conduit for financing higher-yield currency purchases in carry trades, but intensifying hawkish signals from the BOJ could trigger the unwinding of these prevalent bearish positions.

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Embracing Change in Japan's Investment Landscape

A seismic shift in Japan's monetary stance could witness an increase in scrutiny on Japanese assets, with the curtain falling potentially on negative interest rate policies.

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For Arnout Van Rijn, an expert portfolio manager at Robeco with over three decades of experience in Japanese equities, this represents a call for jubilation. "I’m over the moon, it’s fantastic," he exclaimed, signifying that Japan has triumphed over deflation and stands on the threshold of reverting to conventional monetary policies.

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In essence, as the BOJ navigates through monetary policy decisions, a collective breath is held across investment circles, banking on the course the pivotal meeting will chart. Adjustments in the BOJ's strategies could fundamentally alter the investment topography, signaling a transformative phase for Japan’s financial markets and investment opportunities.

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The forthcoming announcements from the Bank of Japan therefore carry more than routine significance. They arrive as beacons that may illuminate new contours of profitability and strategy for a broad spectrum of market participants. From equity investors riding the heady wave of a benchmark index, to fixed-income veterans betting against an outmoded debt market, the course of action by Japan's monetary guardians could be the harbingers of a new era.

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As developments unfold, market players will continue to synthesize the signals emanating from the BOJ, and adapt their strategies for an investment climate that promises to be as dynamic as it is unpredictable. While the clarity of the BOJ’s path remains yet to be fully disclosed, the Japanese markets have never seemed more alive with possibility.

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With information sources such as Bloomberg covering the unfolding events and providing insights (, investors around the globe have a wealth of information at their fingertips to guide them through the intricacies of Japan's financial rebirth.

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The world watches on with bated breath, ready to witness whether the Land of the Rising Sun will indeed usher in a dawn of refreshing financial principles, or if the old adage of cautionary investment tales proved itself prescient once again.

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In closing, the coming week holds more than its usual share of intrigue, as the BOJ's decisions will not only impact domestic markets but reverberate through international financial systems. Regardless of the outcomes, the moves made will undoubtedly leave an indelible mark on the narrative of global economics, with Japan playing a role it has not assumed for decades—a nation reengaging with bold financial optimism.

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--With assistance from Masaki Kondo and Carter Johnson.

©2024 Bloomberg L.P.