As the Bank of Japan considers a policy overhaul, the market reorients
After decades of falling prices, global inflation winds are finally blowing into Japan's economy, forcing investors to rethink their bets on the country completely as the Bank of Japan considers a policy overhaul.
International investors, who have long favored stocks that benefit from Japan's aging population or a weak yen, are taking a different approach, focusing instead on expected higher interest rates, more generous dividends and a recovery in consumer spending.
If the forecast long-term inflation rate of 2 per cent in 2024 does materialise, it could herald an entirely new approach to investing in Japan. Japanese shoppers, no longer counting on sustained price declines, are likely to go on a buying spree. If the Bank of Japan pushes interest rates above zero for the first time in years, banks' lending margins will rise.
Japan's stock market has risen to its highest level since 1990, with consumer and financial stocks outperforming domestic indices. On the downside, inflation has darkened the outlook for Japanese government bonds.
Junichi Inoue, head of Japanese equities at K Janus Henderson, said: "Consumer companies with pricing power to increase revenues and profits by passing on higher energy and food costs to customers are in focus. I like convenience stores, margins have really been going up, and earnings have been good, surprising."
In Japan, real wages, adjusted for inflation, fell for the 18th straight month in September. But large employers are expected to agree to big raises in the spring.
James Hals, portfolio manager at KPlatinum Asset Management in Sydney, said: "You really need to see services inflation so that inflation is sticky, and that's driven by wages."
Japan's core consumer prices are expected to accelerate again in October on Friday. Global fund managers are the most optimistic about Japanese stocks in five years, according to a Bank of America survey. Even Warren Buffett is buying.
David Hogarty, senior portfolio manager at KBI Global Investors, said: "He is optimistic on Japan, in part because rising inflation will force companies to raise dividend payments." Normally, if you increase the dividend in times of inflation, people like that. Japan currently has the highest dividend growth rate in the world at about 20 per cent year-on-year."
The bond market is expected to become less attractive
The Bank of Japan has long supported the bond market through government bond purchases to cap yields and restrain domestic borrowing costs. But with the Bank of Japan forced to tighten monetary policy, investors are wary of the end of this so-called yield curve control policy.
Jon Day, global bond portfolio manager at Newton Investment Management, said: "Inflation in Japan may not be temporary because it hasn't happened in the US or Europe. Of course, the bond market is not yet fully priced. Five-year JGBS yield about 0.35%. Even if Japan's long-term inflation rate is 1 per cent, it will have dire consequences."
Gregory, CIO fixed income at Amundi Pioneer, Europe's largest fund manager, said: "He has a short position on 10-year JGGB because he expects yields to rise from around 0.8 per cent now as bond prices fall.
Frederic Ducroser, head of macroeconomic research at Banque Picte &Cie, said: "The direction of travel is clear - an end to ultra-loose monetary policy. The currency is expected to strengthen into 2024."
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