The
Bank of Japan
‘s recent signal it is moving toward a tighter monetary stance is good news for Japanese stocks—but not for U.S. stocks and bonds.
For seven years, the BOJ had held rates between 0 and 0.5%, scooping up Japanese government bonds and engaging in yield curve control to keep a lid on interest rates. A couple months ago, the central bank hinted it could start moving away from its old approach as the country sees the first glimmers of inflation in decades.
It made it clear last week a change is forthcoming. While the BOJ held its short-term interest rate target at 0.1%, it changed its closely parsed language to signal it is taking a more flexible approach. The central bank moved the trading range for the benchmark 10-year bonds from plus or minus 0.5% to plus or minus 1%.
For global markets, the message was the BOJ was no longer willing to act as a buffer, keeping a lid on rates and injecting cash into the economy. It also wasn’t going to wait for higher inflation to start moving in the direction of higher rates.
For Japanese savers, pension funds, and insurers, that means staying close to home suddenly looks much more attractive than buying U.S. Treasury bonds, hedged or unhedged, given the potential for currency fluctuations. While some may opt for Japanese bonds that are now paying positive returns, longer term investors may favor Japanese stocks with a 2.5% and rising dividend yield, keeping the recent rally in Japanese stocks going, says Udith Sikand, analyst at Gavekal Research.
The
iShares MSCI Japan ETF
(ticker: EWJ) is up 16% so far this year and analysts see further gains for Japanese stocks. While Japan’s move away from subzero interest rates will make the currency a less attractive short for investors, the yen is still undervalued and it could take a couple of years to get back to fair value, says Marc Chandler, managing director for Bannockburn Global Forex. That is another plus, Chandler says, for Japanese stocks.
Bank of America’s
Masashi Akutsu writes he favors domestic demand-led stocks, which are generating stronger earnings than exporters, and should benefit from expectations the economy gets a boost from the summer holiday season and rising wages.
Among the bigger domestically oriented stocks with resilient earnings expectations that Akutsu highlights are
Mitsubishi UFJ Financial Group
(8306. Japan), theme park and tourism company Oriental Land (OLCLY), insurer
Tokio Marine Holdings
(8766. Japan), and furniture retailer Nitori Holdings (NCLTY)
Who stands to lose? U.S. assets, cautions Apollo Group Chief Economist Torsten Sløk.
“Japanese investors own a lot of U.S. credit. So when Japanese investors over the coming months will be selling U.S. credit and buying Japanese Government Bonds, it will make borrowing more expensive for U.S. firms in credit market,” Sløk tells Barron’s. And increased borrowing costs, he adds, could be a problem for U.S. stock markets, which are up 20% so far this year.
Yet to be seen is how quickly Japanese long-term investors, who have been big buyers of U.S. and other global bonds, will adjust their portfolios in response to more attractive options at home.
Write to Reshma Kapadia at [email protected]
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