BlackRock Inc., the world’s largest money manager, predicts that Japan’s equity market will emerge as the primary beneficiary of the anticipated shift away from its ultra-easy monetary policy by the Bank of Japan (BOJ). Yue Bamba, head of Japan active investments at BlackRock, highlights that significant underweight positions suggest further fund inflows into the market.
Bamba’s remarks reflect a broader sentiment within the investment landscape, as speculation mounts regarding the BOJ’s policy adjustment. This anticipation indicates that Japanese equities are poised for continued growth following last year’s impressive rally, which marked the largest surge since 2013. With Japan nearing the culmination of its efforts to overcome deflation, bolstered by a decade of reflationary measures under the banner of Abenomics, global investors are increasingly turning their attention towards Japanese equities.
“The focus of Abenomics was to lift Japan out of deflation, a goal that resonated with global investors,” noted Bamba in a recent interview. He emphasized that strong corporate earnings and increased capital expenditure are providing significant momentum to Japanese equities, making them a compelling investment choice compared to other asset classes. Bamba also pointed out that Japan remains heavily underrepresented in portfolios, suggesting untapped potential for further investment.
The BOJ has been laying the groundwork for its first interest rate hike since 2007, as inflation has consistently exceeded its 2% target since April 2022. Bamba anticipates that the central bank will commence policy normalization as early as March, albeit in a gradual and accommodative manner. This contrasts with the tighter monetary policies observed in US and European markets, making Japan an attractive destination for global investors.
Other asset management firms, including Robeco Institutional Asset Management and BNP Paribas Asset Management, echo BlackRock’s optimism. Arnout Van Rijn from Robeco emphasized the pressure on Japanese companies to return more capital to shareholders, further bolstering the bullish outlook for Japanese equities.
The benchmark Nikkei 225 Stock Average has surged by 15% year-to-date, following a remarkable 28% increase last year, nearing historic highs. Share buybacks are also on the rise, exceeding last fiscal year’s levels, indicating strong corporate confidence in Japan’s economic outlook.
Wei Li from BNP Paribas Asset Management shares the preference for equities over the yen and Japanese government bonds, expecting gradual interest rate increases from the BOJ. Li believes that modest rate hikes won’t significantly strengthen the yen or make sovereign debt appealing to investors.
Bamba highlights that even a moderate appreciation in the yen resulting from rate hikes would have limited impact on companies’ earnings, making equities an attractive proposition for dollar-based global investors. He views a 10-15% gain in the yen as “very positive” for equities from a global perspective.
Additionally, Tokyo Stock Exchange reforms further bolster the case for Japanese equities, according to Li. Despite the consensus overweight stance on Japan equities in the market, Li suggests that investors are still underweight, indicating room for further outperformance in the future.
