LONDON (Reuters) – Investors are gearing up for regime change in global markets as the Bank of Japan moves closer to letting go of decades of policies that have depressed the yen, thereby bringing Japanese money home. doing positioning.
By flooding the financial system with cheap cash and keeping interest rates below zero for years, the Bank of Japan has turned the currency into an ideal financing vehicle and invested trillions of dollars in search of better returns. I sent Japanese cash overseas.
It was the last stand in the global race to raise rates, but Japan’s inflation is at its highest level in decades and the yen is steadily strengthening.
This means that as the Japanese market rebounds, portfolio managers will need to factor a strong yen into global stock selection in ways they haven’t in years, such as anticipating mergers and acquisitions. .
Frédéric Leroux, head of cross-asset at Carmignac, said: “The trigger for the revaluation of the Japanese market is the rise in interest rates and the subsequent appreciation of the yen. This is a market that has been undervalued for years. was a value trap.”
The yen has risen more than 11% since last October’s 30-year low against the dollar and about 9% since last year’s eight-year low against the Australian currency.
Kazuo Ueda, who wraps up his first two days as BOJ governor on Friday, stressed the need for ultra-accommodative monetary policy, while hinting at the possibility of rate hikes to keep inflation in check.
Other investors expected more outflows from the major bond markets, which have long offered much higher yields than their Japanese peers, amid growing hopes of policy change.
“The repatriation of assets to Japan is imminent and the numbers are huge,” said Sam Perry, senior investment manager at Pictet Asset Management. “This reversal can be really dramatic.”
Deutsche Bank calculates that Japanese insurance companies and pension funds alone hold $1.84 trillion in overseas assets, larger than South Korea’s economy.
Japanese investors are the largest foreign holders of US Treasuries.
Japan’s inflation is at its highest level in 40 years, excluding energy, and the Bank of Japan may consider ending its Yield Curve Control (YCC) policy. this year.
Some market watchers think it could happen again this week.
“Policy normalization could turn back time for Japanese investors.”
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Ron Yen?try stocks
Citi strategists have set a target of 125 yen to the dollar versus the current 134 yen to the dollar, but expect the yen to appreciate further from this target over time.
The prospect of a surge in consumer spending in Japan, where decades of deflation has inspired people to save money and wait for products to become cheaper, is a drag on the long-ignored stock market. It’s arousing interest.
Carmignac’s Leroux said a recent recovery in inflation could boost wages and thus consumption, due to Japan’s aging population and labor shortage.
He added that a stronger yen would increase households’ ability to buy imports, all of which could combine to boost the economy.
The Tokyo Nikkei (.N225) has been trading at a discount to the S&P 500 (.SPX) for nine years. The price/earnings ratio is currently at 14.7 compared to 22.7 for the US index.
Carmignac, like many global investors, maintains an underweight position in Japanese stocks, but Leroux said he was looking to move it to neutral.
domino effect
Japan is a heavyweight in the global bond market. Yield-hungry investors own about 6% of Australian bonds and 4.1% of French bonds, according to Deutsche Bank. Japanese investors also hold over $1 trillion in U.S. Treasuries.
But if big markets are hit, it can have knock-on effects for smaller markets as well.
“Without liquidity, there is a risk that the market will put pressure on weaker spots such as eurozone peripheral bonds,” said Wouter Sterkenboom, chief investment strategist for EMEA at Northern Trust Asset Management. Stated.
Still, Sturkenboom said he only expects YCC to change its policy over time.
Japanese investors dumped foreign bonds in 2022. That trend has reversed in his early 2023, but Deutsche Bank says domestic investors will buy another $600 billion worth of domestic bonds as the Bank of Japan pulls back from large bond purchases that have suppressed yields. I’m assuming it’s likely.
Due to the low interest rates in Japan, the yen is the currency of choice for carry trade funding. Carry trades typically involve a trader borrowing a low-yielding currency, selling the proceeds, and investing in a high-yielding currency denominated asset.
Analysts say the yen remains the ideal carry trade currency, but Bank of America research shows the market hasn’t sold the yen to fund carry trades for some time. .
“Conversations with clients suggest the market is (currently) at least neutral to the yen,” the bank said in a note.
Reporting by Naomi Rovnick, Amanda Cooper, and Harry Robertson. Edited by Dhara Ransinghe and Clarence Fernandez
Our criteria: Thomson Reuters Trust Principles.
