Japan: Tailwinds for markets to continue

Since Kazuo Ueda took over as governor of the Bank of Japan (BOJ) in April, global markets have been fixated on the prospects of a change to the central bank’s ultra-accommodative monetary policy. 

The BOJ’s July policy meeting was indeed a focal point for traders, thanks to a surprise tweak to the yield curve control policy that triggered a series of sharp swings in the yen. 

Short-term bets on policy changes, however, are only part of the story. Japanese markets have much more to offer. 

Confidence in equities 

At a time when other major capital markets are grappling with dramatic rate hikes and the prospects of a recession in the US and Europe, Japan’s markets are in an attractive comfort zone for global investors. 

Societe Generale remains bullish on Japanese equities, which have been an impressive outlier amongst major benchmarks, with the Nikkei 225 index gaining 16% from April to July. Japanese corporations are currently shareholder-friendly, with share buybacks at historically high levels, and Warren Buffett’s continued investment in major trading corporations is lifting confidence among other investors. 

The long-term case for Japanese equities is strong. Wage growth is back, with annual wage talks delivering an average pay rise of 3.58%, the highest since the early 1990s.¹  And there is ample room for Japanese institutional investors to increase their allocation to domestic stocks when interest rates do eventually increase. 

Yield appeal

While the outlook for Japanese government bonds (JGBs) will depend on the BOJ’s next steps, it is worth noting that JGBs offer more attractive yields on a net carry basis than they have for the past two decades. 
 

JGB yield is still low compared to OIS yield and corporate bond yield

Source: SG Cross Asset Research, Bloomberg

By holding JGBs with an FX hedge, US dollar and Euro investors can benefit from attractive pickups versus their domestic government bonds. On the top of this, speculation about policy changes has captured the attention from a wider range of investors all over the world, adding to liquidity and trading opportunities. 

Fundamentally, investors can be confident that Japan’s economy has defeated the spectre of deflation and is looking to the future. With prices rising and wages growing, the BOJ can finally begin a gradual normalisation of monetary policy. 

Over time, that will narrow the yield gap between JGBs and US Treasuries and support the Japanese currency, but this will be a gradual process. While the BOJ will allow 10-year government bond yields to exceed a previous ceiling of 0.5%, a dramatic tightening of monetary policy is not on the cards and the tailwinds for Japanese assets remain firmly in place. 

Market access

The trading activity around the BOJ’s July meeting is the latest sign that Japan is back on the radar for global investors. 

Societe Generale has remained committed to the Japanese markets for the past five decades, and is proud to be a top five broker on the Tokyo Stock Exchange with a 7% market share, in the top two for listed derivatives with a 16.3% market share, and a major player in JGBs as a primary dealer since 2012. 

As Japanese monetary policy moves into a new phase, Societe Generale continues to see rich pickings for traders and long-term investors and look forward to facilitating market access for its domestic and international clients. 

‘This Month in Asia’ is a regular series by Societe Generale’s Global Markets division that brings together regional experts across Research, Equities, and Fixed Income & Currencies to share insights and its capabilities in Asia markets for clients around the world.   

For more information on Societe Generale’s Global Markets offer, please visit: https://www.societegenerale.asia/en/our-offering/global-markets/ 
 

1. https://www.reuters.com/markets/asia/japan-regular-wages-jump-most-since-1995-after-labour-talks-2023-07-06/ 

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