The Japanese equity market is in a positive moment, boosted by the Bank of Japan’s (BoJ) monetary policy and strong domestic demand for foreign assets, especially government bonds. This outlook is based on several factors that suggest that Japanese stocks will be an attractive investment in the coming months.
Market context
Although the BoJ has indicated possible changes in its monetary policy, its stance remains conservative. An aggressive increase in interest rates is not expected in the near future. This, together with the relative strength of the yen, creates an environment that favors the purchase of foreign assets and maintains a favorable risk premium for Japanese equities.
BoJ monetary policy
The BoJ has kept interest rates at extremely low levels, even with rising inflation. Inflation in August, for example, was lower than expected, with a rate of 1.6% year-on-year excluding food and energy. This reduces pressure for an immediate rise in interest rates, which prolongs an environment of low yields on government bonds and keeps the risk premium at an attractive level for equity investing.
Yen stability
Over the summer, the yen has experienced significant appreciation, gaining more than 20% in value relative to other currencies. This has given Japanese investors greater purchasing power to buy foreign assets, especially government bonds. Japanese investors poured more than $51.3 billion into foreign debt purchases in August alone, a record number.
Global market reactions
Major international financial institutions such as JPMorgan, UBS and BNP Paribas have advised investors to remove currency hedges from Japanese asset positions, suggesting they see the yen’s strength as a sustaining factor. This continued strength allows private and institutional investors in Japan to acquire more foreign assets with the same face value in yen, also favoring the purchase of Japanese stocks in a low-inflation scenario.
Factors Favoring Japanese Stocks
High demand for foreign bonds
Domestic demand for foreign government bonds has increased considerably, which has positively affected the supply of Japanese assets as investment moves overseas. The strong yen allows for greater acquisition of bonds and other assets abroad, and this situation has put pressure on the bond market, but has left stocks in an attractive position.
“TINA” scenario (There Is No Alternative)
The BoJ’s low rate policy keeps bond yields below implied equity yields, creating the No Alternative (TINA) phenomenon. This scenario leads many investors to view equities as the only viable option for an acceptable return, as bond yields are increasingly low and uncertain as inflation continues to fluctuate.
Short and long term forecasts
Most analysts do not foresee major changes in BoJ policy before the end of the year. However, some data to be released in October on wage growth could influence future decisions on interest rates. The start of an interest rate hike cycle would be gradual and the 1% neutral rate is not expected to reach until at least 2026.
Shares (N225)
Japanese stocks are a good bet because of their high risk premium relative to other assets. With inflation under control and low interest rates, it is recommended to overweight stocks.
Government bonds
Government bonds have a low expected return and it is recommended to underweight this asset class. The yield target for the bonds is 1.25%.
Forex –(USD-JPY)
Despite the current strength of the yen, the USD-JPY pair is forecast to be neutral with a medium-term target of 140, suggesting that a large fluctuation in this currency is not expected in the near term.
The Japanese equity market benefits from a favorable economic and political situation, with low interest rates, controlled inflation and the strength of the yen. These factors make Japanese stocks an attractive choice for investors looking for returns in an increasingly uncertain global environment.
Team Minvestgrup
Sources: Andbank
