Japan: Tailwinds for markets to continue
Japan continues to catch global investors’ eyes – and it’s not just a short-term bet.
Since Kazuo Ueda took over as governor of the Bank of Japan (BOJ) in April, global markets have been fixated on the prospects of a change to the central bank’s ultra-accommodative monetary policy.
The BOJ’s July policy meeting was indeed a focal point for traders, thanks to a surprise tweak to the yield curve control policy that triggered a series of sharp swings in the yen.
Short-term bets on policy changes, however, are only part of the story. Japanese markets have much more to offer.
Confidence in equities
At a time when other major capital markets are grappling with dramatic rate hikes and the prospects of a recession in the US and Europe, Japan’s markets are in an attractive comfort zone for global investors.
Societe Generale remains bullish on Japanese equities, which have been an impressive outlier amongst major benchmarks, with the Nikkei 225 index gaining 16% from April to July. Japanese corporations are currently shareholder-friendly, with share buybacks at historically high levels, and Warren Buffett’s continued investment in major trading corporations is lifting confidence among other investors.
The long-term case for Japanese equities is strong. Wage growth is back, with annual wage talks delivering an average pay rise of 3.58%, the highest since the early 1990s.1 And there is ample room for Japanese institutional investors to increase their allocation to domestic stocks when interest rates do eventually increase.
While the outlook for Japanese government bonds (JGBs) will depend on the BOJ’s next steps, it is worth noting that JGBs offer more attractive yields on a net carry basis than they have for the past two decades.
JGB yield is still low compared to OIS yield and corporate bond yield
Source: SG Cross Asset Research, Bloomberg
By holding JGBs with an FX hedge, US dollar and Euro investors can benefit from attractive pickups versus their domestic government bonds. On the top of this, speculation about policy changes has captured the attention from a wider range of investors all over the world, adding to liquidity and trading opportunities.
Fundamentally, investors can be confident that Japan’s economy has defeated the spectre of deflation and is looking to the future. With prices rising and wages growing, the BOJ can finally begin a gradual normalisation of monetary policy.
Over time, that will narrow the yield gap between JGBs and US Treasuries and support the Japanese currency, but this will be a gradual process. While the BOJ will allow 10-year government bond yields to exceed a previous ceiling of 0.5%, a dramatic tightening of monetary policy is not on the cards and the tailwinds for Japanese assets remain firmly in place.
The trading activity around the BOJ’s July meeting is the latest sign that Japan is back on the radar for global investors.
Societe Generale has remained committed to the Japanese markets for the past five decades, and is proud to be a top five broker on the Tokyo Stock Exchange with a 7% market share, in the top two for listed derivatives with a 16.3% market share, and a major player in JGBs as a primary dealer since 2012.
As Japanese monetary policy moves into a new phase, Societe Generale continues to see rich pickings for traders and long-term investors and look forward to facilitating market access for its domestic and international clients.
‘This Month in Asia’ is a regular series by Societe Generale’s Global Markets division that brings together regional experts across Research, Equities, and Fixed Income & Currencies to share insights and its capabilities in Asia markets for clients around the world.
For more information on Societe Generale’s Global Markets offer, please visit: https://www.societegenerale.asia/en/our-offering/global-markets/
IMPORTANT NOTICE: THIS IS A MARKETING COMMUNICATION. PLEASE READ THE IMPORTANT INFORMATION BELOW.
INFORMATION FOR SPECIFIC RECIPIENTS:
This website and its contents is a marketing communication (“document”) from the Global Markets division of Societe Generale (“SG”) and is not a product of SG’s Investment Research department (“SG Research”). This document is prepared for and intended to be distributed in Asia solely to sophisticated and professional clients. You should therefore be appropriately qualified as a professional, accredited, wholesale, expert or institutional investor (however defined in your local jurisdiction). It is distributed by licensed affiliates of Société Générale which is a French credit institution authorised by the Autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control and Resolution Authority) in accordance with applicable regulations and Société Générale’s internal policy. You should be aware that local regulations may not allow this document to be distributed from your local Société Générale licensed affiliate, but may allow it to be distributed from an offshore branch or affiliate under certain circumstances. If in any doubt, you should always determine which licensed affiliate is responsible for distributing this document to you by contacting Société Générale. You should also be aware that financial products or services referred to may not be sold, bought or subscribed to if you do not qualify in your local jurisdiction. Always ensure that you contact and deal through appropriately licensed entities if you wish to purchase any such products or services.
This website and its contents are for informational purposes only and is not a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument or service. The contents may refer to investment recommendations issued by SG Research, and such content is for professional, accredited, wholesale, expert or institutional clients (however defined in your local jurisdiction) only. Visitors to this site should not take any investment decision based on the summary material provided here, which should be read in the context of the underlying research report made available to subscribers.
Unless otherwise stated, any views or opinions expressed in the presentation are solely those of the presenter(s) and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale and its affiliates. No part of the presenter(s) compensation was, is or will be related, directly or indirectly to the specific views expressed herein. Any facts, views, data or information (hereinafter referred to as “information”) contained in this document is based upon sources believed to be reliable, but have not been independently verified and may change without notice. No warranties of any type are provided in relation to the information. The views and opinions contained herein are those of the author of this document as of the date of this document and are subject to change without notice. Neither the presenter(s) nor SG has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including but not limited to any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, SG does not accept any duty, responsibility or liability whatsoever arising from the use of the document or information contained herein. In particular, SG does not warrant the accuracy of the information contained in this document, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or fitness for a particular purpose.
This document should not be construed as investment research as it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Therefore, even if it contains a research recommendation, it should be treated as a marketing communication. This publication is not subject to any prohibition on dealing ahead of the dissemination of investment research. Notwithstanding the preceding sentence SG has set, in accordance with applicable regulation, effective administrative and organizational arrangements, including information barriers to prevent and avoid conflicts of interest with respect to the investment recommendations contained in this publication. Research publications supporting this document were issued on their stated publication date and may have already been acted upon by clients of SG.
IMPORTANT INFORMATION FOR ALL RECIPIENTS:
Where applicable below, "SG" means Société Générale and/or its relevant affiliates. General disclaimer regarding financial products and services: Financial products and services contain a variety of risks (including market, credit, financial and regulatory risks), which may lead to capital loss and regulatory consequences if not used in accordance with local laws. You should be familiar with all risks associated with any product or service and should not invest in or utilise any financial products or services in this document unless you fully understand and are willing to assume such risks. If you are in any doubt about the risks involved in a product or service, you should seek further clarification of the risks with the distributor or provider of the product or service or seek independent professional advice.
Tax risk: The benefit of any tax advantages that may be referred to in this document depends on your particular tax status, the jurisdiction from which you transact as well as applicable laws that can change any time.
Not advice or recommendation: This document does not constitute proper investment advice. SG has not determined whether the transactions or services described in here are suitable, and independent financial, tax and legal advice should be sought by you prior to any transaction or engagement of service.
Not an offer or contract: This document is neither a contract nor an offer to enter into any financial transaction or purchase or sale of any financial product or service. The terms of any transaction or service are governed by a separate contract that is agreed and executed between the parties or otherwise sent by SG, and not this document.
No further disclosure, reproduction or reliance permitted: This document has been prepared solely for persons it has been distributed to directly by SG. Its contents may not be disclosed to, reproduced or used or relied upon by, any other person, or used for any other purpose.
No duty to disclose or account for SG's role in securities or derivatives: SG may deal in, profit from the trading of, hold or act as market-makers or act as advisers or brokers in relation to the securities, or derivatives mentioned in this document, or be represented on the board of entities issuing such securities. It is under no obligation to disclose or take account of this document when advising or dealing with or for its customers.
For any complaint you may have, please contact us using the following link: https://wholesale.banking.societegenerale.com/en/compliance-regulatory-information/useful-information/client-claim/
INFORMATION RELATING TO SPECIFIC PRODUCTS AND SERVICES:
Authority to transact: It is your responsibility to ascertain that you are authorised to enter into any transactions or execute any agreements relating to any product or service.