A man walks past an electronic quote board showing the closing number of the Nikkei Stock Average on the Tokyo Stock Exchange in Tokyo on October 18, 2022.
Kazuhiro Nogi Afp | Getty Images
BlackRock, the world’s biggest asset manager, has cut Japanese stocks to “underweight” – as Japan is set to elect a new governor to lead its central bank.
The change in leadership could lead to a hawkish pivot for the Bank of Japan, which has maintained an ultra-dovish stance as global peers turn to steep rate hikes to tackle rising inflation.
“We downgrade Japanese stocks in the policy uncertainty and worsening economic environment,” BlackRock’s research arm said on Friday, before the government submitted a central bank vote to parliament. It also said the possibility that central banks could end their yield curve control program would push global yields higher and reduce risk appetite.
“Uncertain monetary policy and the sensitivity of the Japanese economy to a slowdown in other major economies led to the change,” the note said.
Recent declines in earnings growth estimates suggest Japan’s economy may be slowing down, BlackRock added.
On Tuesday, the Japanese economy reported an expansion of 0.6% in the last quarter of 2022 on an annual basis. While technically averting a recession, the rebound has been smaller than expected.
“We think a policy change could happen at any time – eliminate it [YCC] “Cap risk is pushing global yields higher and reducing risk appetite,” the note said.
In December, global yields rose after the Bank of Japan widened the yield curve tolerance from 25 basis points above and below 0% to 50 basis points.
US Treasury yields rose, with the 10-year note and 30-year note jumping 7 and 8 basis points, respectively. European government bonds are also on sale, including Germany’s 10-year bund.
The Japanese flag flies over the Bank of Japan (BoJ) headquarters building in Tokyo on April 27, 2022.
Kazuhiro Nogi Afp | Getty Images
Japan’s core consumer price index hit a 41-year high in December. The nation is scheduled to release its inflation print for January on February 24.
“We think that paves the way for the BOJ to cancel a policy that by its own measures can achieve its goal: to raise inflation continuously to the target of 2% supported by wage growth,” BlackRock strategists said in a note.
“Regardless of who takes over, we think the wage and inflation dynamics at play mean that the current policy stance is on track,” he wrote.
Different scenarios
BlackRock presents various scenarios for the hawkish pivot.
One possibility is that the Bank of Japan further widens its tolerance range beyond 50 basis points. BlackRock notes the yield on Japan’s 10-year government bonds has exceeded limits. The end remains unchanged at 0.5% – the upper ceiling of the band.
Another possibility is for the Bank of Japan to abandon control of the yield curve altogether.
“That will push yields higher and accelerate interest rate volatility,” BlackRock said, adding that removing the program would put the central bank “on track to stop buying bonds.” The company noted that the BOJ owns more than half of JGB’s outstanding shares.
Nikkei separately reported earlier this month that the central bank bought 23.7 trillion yen ($182 billion) of JGBs in January, a new record high.
global spillover
A shift in the Bank of Japan’s monetary policy will raise the possibility of global spillover, BlackRock added.
“The gravitational pull between developed market bond yields increases the risk of global spillover, in our view – especially if Japanese investors cut their large holdings of foreign bonds,” he said, adding that a rise in global yields would hurt risk sentiment around the world.
“Policy changes could make the BOJ buck the larger trend by major central banks to boost yields rather than reduce them,” he said.