Market Views: Expectations from Japan's incoming central banker

With a surprising pick as new governor, the Bank of Japan might be poised to change tack on its monetary policy. AsianInvestor asked asset managers what this appointment could mean for public markets.
Market Views: Expectations from Japan's incoming central banker

The Japanese government has named Kazuo Ueda as its pick to succeed Bank of Japan (BOJ) governor Haruhiko Kuroda.

Kuroda, who retires on April 8, leaves behind a policy that helped keep the cost of funding the country's huge debt pile extremely low. Ueda's nomination, if confirmed, would come as the BOJ faces growing pressure to phase out yield curve control (YCC) as inflation runs hot and criticism grows for its heavy-handed intervention distorting bond market pricing.

Investors reacted with surprise on February 10 to news when academic Ueda, an economist and former member of the central bank’s policy board, was named as the country's next top central banker. They quickly snapped up the yen and sold bonds on expectations that he will end years of super-easy monetary policy.

While Ueda is considered an expert on monetary policy, most analysts said the appointment of the 71-year-old was quite unexpected and might signal a move to phase out ultra-low interest rates sooner than expected.

Against the backdrop of the current macroeconomic outlook and recent steps from the Bank of Japan, AsianInvestor asked asset managers what opportunities investors can expect to see in Japanese equities and fixed income.

The following contributions have been edited for clarity and brevity.

John Vail, chief global strategist
Nikko Asset Management

John Vail

Asia’s investors certainly have many good targets within the region, especially when compared to the US market, which has become quite expensive despite earnings trending downward.

Japan’s market may seem rather mature to many investors, but its corporate earnings trend is actually expected to continue marching upward.

Despite low domestic GDP growth and declining demographics, Japan’s corporate profit margins have soared over the last two decades. Most of northern Asia faces slower GDP growth in the intermediate term due to lower demographics, but Japan proves that with technological improvement, better use of female and aged workers, improved corporate governance and restrained taxes, a country can have surging corporate profits.

The BOJ’s policy should not change too much in the short to intermediate term and the pressure on the bond market will likely be alleviated as economists expect inflation to peak very soon and head below the BOJ’s target by the third quarter.

Tomo Kinoshita, global market strategist, Japan

Tomo Kinoshita

We have constructive views on Japan’s equity market as we expect five forces to support Japan’s economy, namely, improving service sector spending on economic re-opening; aggressive fiscal policy under the  Kishida administration; excess household savings accumulated during 2020-2021; resilient corporate capital investment demand due to firms’ desire to enhance productivity amid labor-shortage problem; and rising inbound demand.

So even though Japan’s exports are likely to decelerate sharply due to slower growth in the US and Europe, Japan should be able to achieve relatively high economic growth in 2023. There are considerable uncertainties on the direction of monetary policy under the incoming BOJ Governor Kazuo Ueda.

But Dr. Ueda’s previous comments suggest that he is unlikely to embark on monetary tightening soon, which should prevent a sharp depreciation of yen in the short term.

In fact, as the BOJ continues its endeavor to achieve 2% inflation target, the BOJ is likely to encourage Japanese firms to raise wages at faster pace, which should necessitate sustained monetary policy easing. On the other hand, there is a risk that the BOJ conducts tightening policy if market distortions become larger, under which investing in JGBs would become more attractive.

Aninda Mitra, head of Asia macro and investment strategy
BNY Mellon Investment Management

Aninda Mitra

The appointment of Dr. Ueda is indeed a surprise, marking a break from the longstanding practice of either career central bankers or finance ministry bureaucrats getting the top job at the Bank of Japan.

Dr. Ueda’s appointment, thus, reiterates our view that a re-imagination of Japan’s policy framework is in the works, and it will result in a pivot from yield curve control (YCC) in a way which minimises asset purchases going forward. This will result in higher JGB yields and a firming trend in the yen.

However, we do not believe negative interest rates (NIRP) will be discarded just yet in view of the new governor’s focus on real short-term rates.

From an investment standpoint what this means is that higher long-term rates and steeper yield curves will mainly favor Japanese banks and insurers whose profitability has long been suffocated by years of ultra-low rates.

We also think the equity price of domestically focused medium-sized companies will benefit more than their globally oriented larger conglomerates. This is because Japan’s own re-opening impulse and lagging policy normalization will sustain its economic recovery through this year even as the US and EU economies slow.

Moreover, larger companies will see the tailwinds from Yen weakening turn into headwinds in coming months.

Junichi Inoue, head of Japanese equities
Janus Henderson

Junichi Inoue

We believe Japanese equities provide extremely attractive opportunities for stock pickers for 2023. In 2022, the market was driven by macro issues such as rate hikes in major economies and fear of global recession. Any positive development at corporate level has been almost ignored. We find many stocks on very cheap multiple simply because investors did not want to have exposure in certain industries for macro decision.

We are not sure the market is paying attention to growth. Despite difference in mid- to long-term earnings outlook, companies within the same industry are traded on similar multiples. Q4 earnings season has almost finished, and we are observing some change in this trend. Shares of companies with solid results and positive outlook are finally getting positive reactions, which we believe will continue.

Fixed income investment, on the other hand, provides less attractiveness from an equity investor’s point of view. There is more than 2% gap between Topix’s dividend yield and a 10 year JGBs. When dividends are growing faster than earnings growth, we see little attractiveness in bond yield.


Akira Fuse, institutional equity portfolio manager
MFS Investment Management

Akira Fuse

As Japan continues to be impacted by both global and imported inflation, alongside a weakening currency, we’re beginning to see a number of structural economic changes occur.

Namely, a reversal of Japan’s sticky deflationary environment, which has helped to create tailwinds for the domestic economy and businesses by way of increased pricing power and driving positive earnings growth.

This growth environment, paired with inexpensive stock valuations, means that Japanese equities are an attractive option for Asian investors.

Another change to note is the improvements to Japan’s corporate governance practices.

When considering fixed income opportunities, Japanese government bonds (JGBs) offer highly attractive currency-hedged yields compared to other OECD developed markets but are subject to elevated policy-related uncertainty. 

Looking ahead, it will be important to keep an eye on the upcoming National Diet hearings of Professor Ueda, the nationwide CPI, as well as BOJ Governor Kuroda’s final policy decision meeting, for further direction.

Raf Choudhury, investment director of multi-asset solutions

Raf Choudhury

For now, the macroeconomic background in Japan doesn’t yet signal the need for an immediate policy change but inflation continues to run high by Japanese standards around 3% and wage inflation continues to climb but the nomination of Kazuo Ueda to governor of the Bank of Japan has raised questions around future policy path.

Markets are unsure about Ueda's stance on inflation. While serving on the BoJ’s policy board, Ueda in a more dovish move, voted against the August 2000 hike which briefly lifted Japan’s policy rate off the zero bound, calling the move premature.

More recently though he has expressed more hawkish views indicating he is against yield curve control and the pegging of 10yr JGBs citing that it makes the market prone to speculative attacks and has said the BoJ needs an exit strategy.

That final comment though leads us to believe there is a higher chance of YCC removal but we do not expect the BOJ to hike front end rates in 2023 even with the appointment of Ueda. Given that we expect to see a steepening in the Japanese yield curve which is already being reflected in Japan’s 10-year overnight index swap rate which is currently at 0.85%.

Dwyfor Evans, head of APAC macro strategy
State Street Global Markets

Dwyfor Evans

While Japan is still an undervalued equity market, it is perennially so. What is notable is that with headwinds on global growth, a stronger yen and caution on equities more generally, investors are not swooping in to bargain hunt in Japan.

Analysts remain positive on Japanese equities on valuation, but at this stage of the cycle, other regions with stronger fundamentals qualities offer better opportunities.

As for JGBs, much centres on the debate around the new BoJ governor and the outlook for yield curve control (YCC), with the latter increasingly incompatible with realised prices and household inflation expectations amid a surveyed majority of the latter discounting a 5%+ rate of inflation.

This implies that risks are skewed towards short JGB positions as pressure to remove YCC intensifies. To the extent that higher yields impliy a stronger JPY – the yen is the most sensitive G10 currency to relative yields – then further currency strength would continue to undermine Japanese equities in a vicious cycle for underlying assets.

Robert Tipp, chief investment strategist and head of global bonds
PGIM Fixed Income

Robert Tipp.

First, Japan’s policy progression is unique. While an end to YCC may be at hand, short rates may effectively remain at or near the effective lower bound for the foreseeable future.

Second, the 10-year JGB seems likely to end up higher, reflecting what is likely both a policy shift that allows a steeper curve, and a generally sustained higher global interest rate backdrop.

This combination — a set low cash rate, and higher long rates, or a durably steep and stable yield curve — should create an environment where expected returns in JGB’s hedged into other currencies could actually be quite competitive as the positive yen yield curve’s positive slope will translate into large hedged yield pickups relative to markets with flat or inverted curves.

In short, once the initial adjustment to the end of YCC has passed, Japan is likely to represent a low volatility, low correlation market, that will have positive expected returns resulting from a positive yield curve slope, and a firm money market anchor.

The path of the yen is likely to remain captive to the overall dollar trend. 

Riad Chowdhury, head of APAC

Riad Chowdhury

The markets have speculated over the last several months that the change in the BOJ’s governor seat will likely lead to change in the BOJ’s stance of ultra-loose monetary policy.

Phasing out YCC will lead to a rise in yields in the JGB as well as a strengthening of the yen. Ueda’s appointment announcement impacted initial price action - a rise in JGB yields and strengthening of the yen. However, since then the JPY has weakened.

This reminds us that we can’t look at the Japanese market in isolation.

What this means for Japanese fixed income markets will very much depend on the quantum and pace of any phasing out of YCC, all other things being equal.

Global and Japanese fixed income investors will likely start to consider whether it makes sense for them to rotate out of other fixed income markets (like US Treasuries) into JGBs.

All eyes will be on Ueda’s early comments and actions once he takes over as governor of the BOJ, and we are likely to see that create some choppiness in both JGB yields and the yen.


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