With interest rates raised for the first time in 17 years, will the Japanese stock market continue to rise?

Text/Xia Bin

　　The historic change happened as planned.

　　Recently, the Bank of Japan announced an interest rate resolution, raising the benchmark interest rate from -0.1% to 0 to 0.1%, officially bidding farewell to negative interest rates and canceling the yield curve control (YCC) policy.

This is Japan's first interest rate hike since 2007, in line with market expectations.

　　Why is Japan willing to exit negative interest rates?

What impact will this move bring?

One: Complete the mission

　　Judging from the latest statement, the Bank of Japan believes that achieving the 2% price stability target in a sustainable and stable manner seems achievable, so "Yield Curve Control (YCC) under the Quantitative and Qualitative Monetary Easing (QQE) framework" and negative interest rate policies have accomplished their mission.”

　　When talking about the background of the policy shift, Bank of Japan Governor Ueda Kazuo said that "wages-prices" have entered a virtuous cycle, and the 2% inflation target is expected to be achieved in the future; the results of the "Spring Dome" (annual wage negotiations) are an important factor in exiting negative interest rates. , if prices rise further, interest rates will begin to rise.

　　Invesco Asia Pacific (excluding Japan) global market strategist Zhao Yaoting told China News Service: After experiencing a long period of low growth and deflationary headwinds, the Bank of Japan exited its decade-long ultra-loose monetary policy. A win for the Bank of Japan.

Japan's first round of "spring war" has ended recently, and data shows that overall wages increased by 5.3% year-on-year, the highest wage increase since 1991.

　　"Strong wage growth makes Japan more likely to achieve a virtuous cycle of wages and prices, thereby maintaining 2% inflation. These dynamics are undoubtedly the reasons for the Bank of Japan to raise interest rates." Zhao Yaoting said.

　　Data shows that since Japan’s real estate bubble burst in the early 1990s, Japan’s CPI has never achieved growth of more than 2% for two consecutive years; even after the implementation of Abenomics, Japan’s longest period was only from April 2014 to March 2015. During this period, a honeymoon period was achieved in which the CPI was continuously higher than 2% for one year.

　　Li Chao, chief economist of Zheshang Securities, pointed out that Japan’s wage growth rate will be above 3% for two consecutive years in 2023 and 2024, which has exceeded the ideal wage growth threshold previously considered by the Bank of Japan, which may cause Japan’s inflation level to continue to exceed 20% in 2024. 2%, above the inflation target for two consecutive years.

"With stable and sustainable inflation, the Bank of Japan does have the conditions to normalize monetary policy."

Two: Boost confidence

　　Japan's economy strengthened in the late 1980s, and the Nikkei 225 index reached its peak in December 1989. The index finally hit a record high in February this year and rose above 40,000 points this month.

　　Can Japanese stocks continue their strong performance?

Zhao Yaoting mentioned that the Bank of Japan decided to gradually normalize monetary policy, which is a positive development. The normalization measures may boost market confidence. The first interest rate increase in 17 years sends a strong signal that the Japanese economy is no longer Such a high level of support is needed because its own situation has improved and is expected to continue.

　　Zhong Zhengsheng, chief economist of Ping An Securities, believes that the Bank of Japan's cautious approach to continuing to raise interest rates may weaken market volatility.

　　Specifically, for Japanese bonds, before the cancellation of YCC, the pricing power of Japanese bonds had basically returned to the market, which was mainly affected by the overseas liquidity environment and the Bank of Japan's bond purchases.

A single interest rate hike may not be enough to trigger a massive return of funds to Japan and severely impact global bond markets such as the United States.

　　For the Japanese yen, on the one hand, exiting negative interest rates will not affect the Japanese yen’s status as a financing currency for the time being.

On the other hand, if the Bank of Japan turns more cautious, the yen exchange rate may depend more on the direction of U.S. interest rates.

In addition, the Bank of Japan may also want to see that the yen does not appreciate too quickly.

　　For Japanese stocks, first of all, if the yen does not appreciate significantly, the impact on Japanese stocks will be limited.

Secondly, in the face of higher stock investment returns, the limited rise in Japan's deposit interest rates and bond interest rates may not be enough to make investors give up on Japanese stocks.

Finally, the fundamental driving force of Japanese stocks comes from fundamentals and valuation policies, which will not change due to the Bank of Japan's turn.

　　Li Chao believes that this policy adjustment by the Bank of Japan will not change the upward trend of Japanese stocks:

　　First, Japanese stocks currently serve as low-volatility dividend assets globally. While U.S. stocks continue to surge, Japanese stocks have defensive functions and still have allocation value.

　　Second, the current fundamentals of the United States remain strong. If the economy does not land in the future, it will also provide performance support for Japanese stocks (Japanese companies generate most of their income from overseas).

　　Third, it is expected that the impact of this round of policy adjustments by the Bank of Japan on Japanese stocks will also be limited.

In terms of interest rate hikes, the market has already fully priced in the market, and the probability of higher-than-expected interest rate hikes in the future is limited.

In terms of ETF purchases, although the Bank of Japan officially announced that it will stop ETF purchases, the Bank of Japan has actually stopped increasing its holdings of Japanese ETFs starting from Q4 of 2023, and the marginal impact is also limited.

Three: Will interest rate hikes continue?

　　Looking to the future, Zhao Yaoting bluntly said that we do not expect the Bank of Japan to further raise interest rates before the end of the year.

Potential changes in policy rates will depend on price stability expectations.

For now, the Bank of Japan's core consumer price index (CPI) forecast for the next fiscal year remains at around 2%.

　　He mentioned that unlike the Fed's dot plot, the Bank of Japan did not give a public future policy interest rate path, but may issue more subtle guidance. Comments on the central bank's inflation target deserve careful scrutiny.

　　Zhong Zhengsheng also believes that the Bank of Japan may not be in a hurry to exit the "zero interest rate".

On the one hand, exiting negative interest rates is a key step in normalizing Japan's monetary policy; however, raising interest rates on top of zero interest rates is a conventional policy, and the urgency is relatively low.

　　On the other hand, due to base reasons, Japan's CPI may remain above 2% year-on-year in the first quarter, creating a good window for the Bank of Japan to turn.

However, recent economic data are not solid, and it remains to be seen whether Japan's inflation can truly stabilize around 2%.