Global stocks and bonds have wobbled in the past few weeks. Several central banks have signalled that ultra-loose monetary policy won't last forever. But while the US Federal Reserve, the European Central Bank and the Bank of Canada have been sounding a tad more hawkish, the Bank of Japan (BoJ) remains as dovish as ever.
Its version of quantitative easing (QE) is to buy enough ten-year bonds to keep the yield close to zero. Last week, amid the bond sell-off, it was forced to step into the market for the first time since February. It drove the yield down from 0.11% to around 0.09% back with its comfort zone of -0.1% to +0.1% by offering to buy an unlimited amount of ten-year paper.
This "leaves the yen looking like a sitting duck", says the South China Morning Post. The prospect of an eventual rise in interest rates beyond Japan, improving the prospective yield on assets denominated in other currencies, suggests the yen should weaken. The trend could have some way to run given that inflation is still a long way below the BoJ's target of 2%; consumer prices excluding fresh food and energy have been flat for two years.
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A lower yen will give earnings at Japan's listed companies, many of whom are major exporters, a further fillip. Corporate profits jumped by 28% year-on-year in the first quarter, according to State Street Global Advisors. Positive earnings surprises in Japan far outpaced those in other regions in the first quarter. The accelerating global economy is helping as well.
The strengthening domestic backdrop should also underpin profit growth. The labour market looks robust, with job growth running at an annual pace of 1%, the labour-force participation rate among women reaching a record high in June, and the job-to-applicant ratio hitting another record peak. The unemployment rate should therefore fall from its recent level of 3.1%, says Capital Economics.
Wage growth is also improving. Regular earnings (excluding bonuses) notched up their biggest rise in two decades in May. No wonder the Economy Watchers Survey points to strong gains in consumer spending. Business investment is climbing. Investors should also bear in mind the recent improvements in corporate governance. Management teams are more open to investors' suggestions, while firms are handing back more of their profits to shareholders by repurchasing shares or paying dividends. The yield on Japanese stocks is now at US levels, notes State Street. Throw in reasonable valuations, and there is "a compelling argument" for topping up your Japan holdings.
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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