Japan – Feature
which could add to the potentially bleak outlook, or at best, a great deal of uncertainty.
Global impact The BoJ’s move could have ramifications globally. It is the world’s third-largest central bank, so monetary stimulus in Japan has added to global liquidity for several years now and has been a factor in pushing yields lower across the globe. “In this context, as this policy starts to reverse, it could contrib- ute to causing global yields to rise, particularly as the move is happening at a time bond markets have been shaken by ongo- ing hiking cycles,” says Frédérique Carrier, head of investment strategy at RBC Wealth Management. “This vulnerability was on display during the quasi run on UK sovereign bonds last Autumn.”
If this is a valid comparison then Japan could re-join the wider global economy and be in for a difficult time. This presents Japan diverging from its different path to be in the same depressing lane as the rest of the world. To illustrate the point, the detail seems to add up – the BoJ pol- icy change, on the heels of hawkish Federal Reserve comments and an aggressive ECB meeting in December, seems to have led to a higher 10-year Treasury Inflation Protected Securities (TIPS) yield – the market’s estimate of the 10-year real yield after inflation.
The TIPS 10-year yield had plateaued from the end of Septem- ber and fell in November as market expectations increased that the interest hiking cycle could soon be near an end. But while the exact timing of this decision may have surprised markets, it was, for some investors, an issue of Japan hitting a turning point – and it had to turn. “As 2022 evolved, the Bank of Japan’s policy became increas- ingly irrational,” an asset manager told portfolio institutional. “Maintaining unlimited quantitative easing while also inter- vening to support the yen were simply incompatible policies and something had to give eventually.”
Different stage But while the negative path is clearly a challenge to the positive outlook, it is far from inevitable that Japan will take this road. In fact, the paths open to Japan are still strongest in the pull towards a more positive highway. “While a global recession is now looking increasingly likely, Japan is at a different stage of its economic cycle and there is potential for GDP to continue to grow above its long-term trend rate in 2023,” Maeda says. There are also potential positive currency implications. After the BoJ policy announcement, the yen, which had been chron- ically weak for most of 2022 due to the central bank’s ultra-accommodative policy, surged by close to 4%, achieving its largest daily gain against the US dollar this century.
2023 will bring challenges but the Japanese economy is firmly on the road to recovery and is set to
expand. Hiroyuki Ueno, SuMi TRUST
The yen’s move adds credence to the widely held view that the US dollar’s strength could well wane over 2023. This, in turn, could remove an important headwind for emerging econo- mies, which typically suffer from a strong US dollar, a currency they tend to borrow in. This potentially makes Japanese equities attractive. “We think they should benefit from the rebound in the domestic economy while the return of inflation has led to a sea change in corpo- rate pricing behavior as businesses start to adjust prices upward for the first time in decade,” Carrier says.
Another path
Of course, there is another path that steers between Japan being a sweet investment success and one that tanks. That is one that maintains the investment positives while having to deal with the hard reality of joining the path marked out by the global economy. A third way of sorts.
There are though clearly important positives and sometimes specialist themes for investors to pick out when choosing which path Japan is set to go down. Another is the theme of embracing greater sustainability within Japanese corporates, which could act as a major seed that could grow in the soil of Japan. “As Japanese companies realise the benefits of sustaina- ble business practices, they will continue to develop new sus- tainable strategies to incorporate these into their operations and investments,” says Sasja Beslik, chief investment strategy officer at SDG Impact Japan, a United Nations programme. “Whether driven by financial incentives or a desire to do good, the shift toward next generation of ESG investing is gathering momentum in Japan and is likely to continue to gain ground in the years to come,” he adds. In this way Japan could be creating a whole new investment path for itself.
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