(Bloomberg) — The Bank of Japan’s decision to end its negative-interest-rate policy has left markets largely unruffled because it was flagged well in advance, and the nation’s stocks should be able to extend their recent rally, analysts say.
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Investors expect further rate increases from here to be gradual, which builds the case for Japanese equities to advance, at least over the medium term. At the same time, the end of negative rates means investors, especially those in corporate bonds, will need to be more aware of credit risk.
Investors will now turn to the press conference from BOJ Governor Kazuo Ueda later Tuesday.
Here’s what analysts and strategists had to say:
Charu Chanana, market strategist for Saxo Capital Markets Pte
“A well-flagged decision from the BOJ has helped avoid turmoil in financial markets and reflects the power of strong communication. Commentary suggests that they expect accommodative conditions to persist for sometime which is a signal that concurrent rate rises are unlikely. Yen, therefore, still remains a yield differential play.”
“The new era of non-negative rates is also a confirmation of the recovery in Japanese economy. Higher returns on savings and investments in Japan can fuel spending power for consumers, and builds a case for Japanese equities to extend their momentum.”
Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd.
“In the stock market, foreign investors are expected to positively evaluate this policy change by the BOJ as a sign of structural change in the Japanese economy.”
“Although it’s necessary to look at the range, the BOJ will probably accept a rise of up to about 1.2% on a 10-year nominal JGB rate basis for the time being in order to keep the 10-year real interest rate in negative territory.”
Homin Lee, senior macro strategist at Lombard Odier
“We will have to wait until Ueda’s press conference in the afternoon to see if the BOJ wants to dangle hawkish threats for next few months, perhaps to anchor the yen’s value while the central bank is set to remain on the sidelines and watch data.”
“We remain neutral on Japanese equities, but the fact that the market is taking this in its stride bodes well for the medium-term trajectory.”
Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co.
“We have finally received a positive endorsement that deflation is on its way out, and I think that will be a positive factor. The point is that they would be ending its negative interest rates, but it doesn’t mean that it will go up and up and up, so I think that the overall view is more positive.”
“The point is that going from negative to zero is a rather low hurdle, and going from negative to 0.5 or 0.25 is a bit more difficult.”
Hiromi Ishihara, head of the equity investment department at Amundi Japan
I don’t expect a further rate hike by the BOJ at this stage, so a short-term correction is likely for bank stocks as they have been outperforming.
Given the strong Shunto survey, I expect domestic consumption to recover. Within domestic oriented names, I like machinery and construction given the strong capex demands corporates.
Alex Loo, macro strategist at TD Securities
“Yen bulls will look for any hawkish comments on the pace of hikes and the terminal rate from Ueda in his press conference later, especially if he thinks another hike is likely in the second half of the year.”
“A hawkish Ueda may send USD/JPY quickly below 147.5, the 100-day-moving-average level, and toward the next key support level at 146.7.”
Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Co.
This is be the first step toward a market where investors will be aware of proper credit risk.
“Corporate bonds are not supposed to be a financial product with a long-term duration risk, but notes with 10-year, 20-year, or 30-year, or even 50 year exist now on the assumption that interest rates would fall and the easing would continue.”
–With assistance from Aya Wagatsuma and Ayai Tomisawa.
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