BlackRock Inc., the world’s largest asset manager, and Amundi Asset Management, Europe’s foremost money manager, are both optimistic about Japan’s continued economic resurgence. Foreign investors are flocking to Japan’s stock market, with its blue-chip index recently surpassing its 1989 peak. Both BlackRock and Amundi anticipate that robust earnings growth and improvements in corporate governance will sustain the market’s upward trajectory.
In a note to investors, BlackRock’s Jean Boivin and Wei Li expressed confidence in Japan’s equity rally, suggesting that Japanese stocks have the potential to exceed their all-time highs. The Nikkei 225, Japan’s premier stock index, has already surged by 17% this year, emerging as the world’s top-performing major gauge. JPMorgan Securities Japan Co. forecasts that the Nikkei could climb further to 42,000, attracting more domestic investors to the market.
Rie Nishihara, JPMorgan’s chief Japan equity strategist, believes that the anticipated gains in the market will incentivize corporates to ramp up growth investments and enhance capital efficiency, while also piquing the interest of institutional and individual investors.
Amidst this bullish sentiment, Eric Mijot, Amundi’s head of global equity strategy, predicts a strengthening of the yen against the dollar this year, potentially boosting investment returns for those with unhedged equity holdings. Amundi forecasts the yen to appreciate to 135 against the dollar, prompting foreign investors to weigh their options regarding currency hedging.
Mijot suggests that the catalyst for a stronger yen will likely be the US Federal Reserve’s decision to lower interest rates, rather than the Bank of Japan’s potential move to end negative rates. He anticipates actions from both central banks by April and expects the Fed to implement rate cuts in May or June.
Echoing Mijot’s stance on currency hedging, asset managers like Morgan Stanley and Robeco are also recommending a reduction in hedging activities. However, BNP Paribas Asset Management remains cautious and prefers to guard against currency fluctuations.
Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong, emphasizes the diminishing need for hedging, signaling a potential bottoming out of the yen at 150. He anticipates support for the currency from the Fed’s pause in rate hikes and potential policy shifts by the Bank of Japan.
While hedging remains an attractive option for some dollar-based investors anticipating further yen weakness, the strong inverse correlation between the yen and Japanese stocks suggests potential profits for those betting against the currency’s appreciation. Nevertheless, the yen is projected to strengthen to 137 against the dollar by the end of 2024, according to Bloomberg estimates.
Within the Japanese equities landscape, Amundi favors stocks poised to benefit from corporate governance reforms and those offering high dividend yields. A strengthening yen could particularly benefit small-cap value stocks tied to domestic demand.
In summary, Japan’s stock market presents an attractive proposition for investors, positioned between the high valuations of US stocks and the sluggish growth in Europe. With earnings on the rise and a favorable economic outlook, Japan appears poised for continued growth in the near term.
