SNAP up more Japanese stocks, ratchet up shorts on government debt and keep buying the yen: these are some of the most popular calls from big-name money managers ahead of a central bank meeting that may end the world’s last experiment with negative interest rates.
The stakes are enormous heading into Tuesday’s (Mar 19) Bank of Japan (BOJ) decision. The nation’s blue-chip share gauge is towering near its record high, bond yields are climbing and the weak currency is boosting exporters. How the liftoff of the policy rate will change that dynamic – and whether the BOJ will rein in other tools deployed across markets – are questions at the top of investors’ minds.
BlackRock and Man Group are among those seeing room for further gains in equities as economic vitality returns. RBC BlueBay Asset Management has made shorting 10-year government bonds its biggest macro bet, while abrdn and Robeco are placing bullish yen wagers.
“This is a momentous event,” said Yue Bamba, head of Japan active investments at BlackRock, who expects rate increases to be gradual, keeping monetary conditions accommodative and supportive of stocks. “The drivers of growth are varied, broad and durable. I think we are a long way away from things being fully priced in.”
The outlook for monetary policy will define future capital flows after billions of US dollars have poured in over the past year. The BOJ’s short-term policy rate may rise towards 0.25 per cent in late 2024 from minus 0.1 per cent, overnight-indexed swaps show.
Stocks boom
The Nikkei 225’s rally has stalled since breaching 40,000 for the first time ever earlier this month. The recent breather has failed to deter investors, though they are now more focused on stock picking.
“We are investing more in insurers than banks as we prefer the higher risk-reward and recent governance reforms,” said Michiko Sakai, portfolio manager at JPMorgan Asset Management in Tokyo. “If the BOJ continuously hikes rates along with solid economic growth, then the lenders will move quite positively,” she said.
A gauge of banks on the Topix has surged about 75 per cent since December 2022, when the BOJ surprised markets with a tweak to its yield-curve-control policy. Investors see tighter monetary policy boosting profitability for lenders, whose interest income had been crushed by decades of ultra-low rates.
Man GLG has reduced banking stocks as they rallied over the past 18 months, but its positioning is still ahead of the sector’s representation in the Topix Index, according to Emily Badger, a money manager for the unit of Man Group.
“We are exposed to more contrarian opportunities within the bank sector,” she said. “Real estate and the railways continue to trade at a discount and remain of interest to the team.”
BlackRock, on the other hand, favours broad exposure to the nation’s equities, betting that technology to construction and lending sectors all stand to gain.
Bond bears
If stocks are a buy, then Japanese government bonds (JGBs) appear to be a big sell. The benchmark 10-year yield has risen more than 15 basis points this year to trade around 0.78 per cent.
UBS Asset Management to Schroders have been early movers into bearish positions, plying the so-called “widow-maker” trade even before the BOJ tweaked its yield-control policy. Among the funds making those bets today is RBC BlueBay, which is shorting 10-year JGBs on expectations that benchmark yields could rise to above 1.25 per cent by the year’s end.
“This is the largest macro-risk position we are currently running as it offers the best risk rewards,” said Mark Dowding, chief investment officer at RBC BlueBay, who is expressing his bets through futures and yen swaps.
Abrdn also has underweight JGB positions across its global government bond strategies.
“Looking beyond the first hike we expect the BOJ will stress that policy will remain accommodative, nonetheless we see them being forced into a further hike in the third quarter to bring the policy rate to 0.25 per cent,” said Aaron Rock, head of nominal rates. The fund sees a higher chance of the BOJ abandoning sub-zero rates in April.
Buying yen
Japan’s yawning interest-rate gap with everyone from the United States to Europe has made shorting the yen a popular macro trade. The tables appear to be turning.
Schroder Investment Management has adjusted portfolios to benefit from the yen’s expected gains, while strategists at JPMorgan Chase & Co opened a long bet position on spot yen against the euro last month.
“We expect the tightening of monetary policy to herald a period of strength, with appreciation somewhere in the region of 8 to 10 per cent for the currency versus other majors over the next calendar year,” said abrdn’s Rock, who has bullish yen positions against the pound and euro.
The currency, which has weakened about 5 per cent against the dollar this year to around 148, remains not far from a three-decade low reached in October 2022.
A cheap yen has made it an ideal vehicle to finance purchases of higher-yielding currencies in a strategy known as a carry trade. Hawkish signals from the BOJ may spur an unwinding of bearish yen wagers that hedge funds have accumulated.
In all, investors will be heaping ever more scrutiny on Japanese assets with negative rates potentially relegated to history.
For Robeco’s Arnout Van Rijn, who has covered Japanese stocks for more than three decades, it is a welcome change.
“I’m over the moon, it is fantastic,” said the Rotterdam-based multi-asset portfolio manager. BOJ’s shift would mean that Japan has “fought deflation successfully, and now we can go back to a normal monetary policy”. BLOOMBERG
