- BOJ ends regime of negative interest rates, unwinding ultra-loose monetary policy
- Financial conditions to stay accommodative given weak macroeconomic backdrop
- Structural issues remain with reforms requiring years to yield results
- Removal of negative rates to benefit Japan corporates; bond trading to pick up
- We prefer Japan’s semiconductor sector, megabanks, and consumer stocks with global exposure
The end of an era. The Bank of Japan (BOJ) has embarked on policy normalisation, ending its negative interest rate policy (NIRP) and abolishing yield curve control (YCC). The BOJ will also limit its maximum bond purchases across different yield tenors and end the buying of TOPIX exchange-traded funds and Japan REITS. We believe this serves as a stamp of confidence by the BOJ to mark the end of Japan’s deflationary era, accompanied by the return of stable growth and inflation. Nonetheless, BOJ governors indicate that financial conditions will remain accommodative, and that this is not the beginning of a tightening cycle given a still fragile economic recovery.
Figure 1: “Kishidanomics” vs “Abenomics” – more way to go for TOPIX
Source: Bloomberg, DBS
With the removal of the policy normalisation overhang, we are constructive on Japan equities. We believe the end of negative rates is a positive for Japanese corporates given their low debt and high cash levels, since having cash will no longer be a drag on their income. Besides, banks should benefit from BOJ normalisation and reflation on the back of higher loan growth, fee income, and net interest margins. As the BOJ turns to market determination on yields, bond trading activity should pick up once again. As it stands, banks still trade at around 0.8x P/B on average, with ROE of 8.5%. We expect the rally on Japan’s megabanks to continue.
We remain convicted in the semiconductor sector as the government focuses on its rejuvenation aims of elevating Japan’s worldwide semiconductor manufacturing share to 3% by 2027. We anticipate a ripple effect on Japan’s robust chip infrastructure as they boast exceptional capabilities in the tools and materials essential for cutting-edge chip production, with its suppliers often leading the industry in their specialised domains.
Japan is actively fostering the growth of its semiconductor sector, revitalising hubs in Kyushu, Tohoku, and establishing a new one in Hokkaido. TSMC has established its first Japanese plant in Kyushu in February this year, with the mutual benefit of having big Japanese corporate customers such as Sony, Renesas, and Toyota, amongst others.
We note that Japan’s economic growth remains subdued with a long term potential GDP growth of around 1%. This comes on the back of an ageing population, as well as shrinking labour force and consumption base. Structural reforms implemented by current PM Kishida will take years before bearing fruit. We focus on big cap quality stocks in Japan which lead in innovation and global presence, such as economic heavy weight industries like autos, automation, electronics, and electricals. We prefer consumer stocks where earnings are exposed to global consumers.
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