BlackRock downgrades Japan stocks on possible monetary policy shift
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A man passes an electronic quotation board displaying the closing numbers of the Nikkei Stock Average at the Tokyo Stock Exchange in Tokyo on October 18, 2022.
Kazuhiro Nogi | Afp | Getty Images
BlackRock, the world’s largest asset manager, cut Japanese stocks to “underweight” – as Japan is set to appoint a new governor to lead its central bank.
The change in leadership could lead to a hawkish pivot for the Bank of Japan, which has maintained an ultra-dovish stance while its global peers turned to steep rate hikes to tame surging inflation.
“We downgrade Japanese stocks on policy uncertainty and a worsening economic environment,” BlackRock’s research arm said Monday, before the government submitted its central bank picks to parliament. It also said the possibility that the central bank could scrap its yield curve control program will push global yields higher and reduce risk appetite.
“Monetary policy uncertainty and the sensitivity of Japan’s economy to the slowdown in other major economies spur the change,” the note said.
Recent declines in earnings growth estimates suggest the Japanese economy may slow down, BlackRock added.
On Tuesday, Japan’s economy reported an expansion of 0.6% in the final quarter of 2022 on an annualized basis. While it technically averted a recession, the rebound was smaller than expected.
“We think a policy change could come at any moment – scrapping the [YCC] cap risks pushing global yields higher and reducing risk appetite,” the note said.
In December, global yields jumped after the Bank of Japan widened its yield curve tolerance range from 25 basis points above and below 0% to 50 basis points.
U.S. Treasury yields spiked, with the 10-year note and the 30-year note jumping 7 and 8 basis points respectively. European government bonds also sold off, including Germany’s 10-year bund.
The Japanese flag flutters over the Bank of Japan (BoJ) head office building (bottom) in Tokyo on April 27, 2022.
Kazuhiro Nogi | Afp | Getty Images
Japan’s core consumer price index hit its highest level in 41 years in December. The nation is scheduled to release its inflation print for January on Feb. 24.
“We think that paves the way for the BOJ to roll back policies that by its own measures may have achieved their goal: to foster a sustained rise in inflation toward its 2% target that is underpinned by wage growth,” BlackRock strategists said in the note.
“Regardless of who takes over, we think the wage and inflation dynamics at play mean the current policy stance has likely run its course,” they wrote.
Different scenarios
BlackRock laid out multiple scenarios for a hawkish pivot.
One possibility is the Bank of Japan further widening its tolerance range beyond 50 basis points. BlackRock noted the yield on the 10-year Japanese government bond has surpassed its limit. It last remained unchanged at 0.5% – the upper ceiling of the band.
Another possibility is for the Bank of Japan to abandon yield curve control altogether.
“That would push yields higher and stoke interest rate volatility,” BlackRock said, adding that removing the program would put the central bank “on track to stop bond purchases.” The firm noted the BOJ owns over half of outstanding JGBs.
Nikkei separately reported earlier this month that the central bank purchased 23.7 trillion yen ($182 billion) of JGBs in January, a new record high.
Global spillover
A shift in the Bank of Japan’s monetary policy will raise chances of a global spillover, BlackRock added.
“A gravitational pull among developed market bond yields increases the risk of a global spillover, in our view – especially if Japanese investors cut their large foreign bond holdings,” it said, adding that global yields rising will hurt risk sentiment worldwide.
“The policy change could put the BOJ on course with a larger trend by major central banks to boost yields rather than depress them,” it said.
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