One week / one topic: Japan

What happened?

• For context, on March 19th the Bank of Japan:

  1. Took the historic decision to end its negative interest rate policy (NIRP) and yield curve control (YCC) program, and

  2. Announced it is reverting to “standard” monetary policy, targeting short-term rates as the primary tool and reducing bond purchases over time.

   

• As an immediate market reaction, the sell-off in the Yen actually accelerated (1st chart) to its lowest levels since 1990 (2nd chart)

• Over the last week Japanese authorities clearly signalled their displeasure, and the PM stated that “Japan will take appropriate action against excessive moves” (i.e.: direct currency intervention?)

Our observations

• Fundamentals: 2-year US Treasuries still yield ~4.5% more than equivalent Japanese bonds, leaving for now little (if any) incentive to repatriate dollars back into Yen.

• Price action: The well-telegraphed policy change was apparently already priced in. Markets might now want to test the authorities’ stated resolve to defend the recent lows.

• Investor beliefs: Investors see JPY as a funding currency, but we are not observing complete revulsion yet. Asymmetric opportunities might take longer to arise, if at all.

So what?

If the initial market assessment of the policy announcement is correct and “not much has changed” on this front, Japanese stocks could well continue to outperform (in local currency terms) also thanks to cheaper-than-elsewhere valuations. To boot, Japanese stocks also remain attractive compared to available alternatives for local investors.

Across portfolios, we maintain constructive positioning on Japanese equities.