2020 show much promise for Japan stocks while BOJ looks set to taper its ETF purchases

2020 looking to be a very promising year for Japanese stocks
For our last publication of the year, we focus on Japan’s stock market and its promising outlook for 2020. We turned positive on our own market in late August and since then we have only gained more conviction about our bullish stance, encouraged by BOJ’s more assertive yield curve policy action which in our view should greatly help the financial segments of the market and the surprisingly muted reaction by the Japanese currency which in turn has given the central bank much more breathing room to taper further. 

Although Phase 2 of US/China trade talks look to be more challenging and thus much narrower in its scope as we explained last week, we nevertheless remain optimistic that Japan’s highly cyclical stock market should strongly benefit from green shoots appearing in Europe and China in regards to their economic activity. We are also encouraged by fast improving Japan’s corporate governance regime which is leading to more investment among active investors, pushing for aggressive restructuring programs, more M&A and divestment moves as well as share buybacks which look to set for another fiscal year record, easily surpassing last term’s Y6trn historic high. 

BOJ’s steepening yield curve policy becoming increasingly assertive 
As we have been strongly anticipating in the past quarter, the 10 year JGB yield has convincingly broken out above zero and judging by the latest comments from the BOJ governor, Kuroda-san, higher yields will be more than tolerated going forward. Meanwhile, BOJ continues to aggressively taper its longer dated government bond buying with purchases of paper with durations beyond 25 years having already halved since January with much of the cuts coming in the 2nd half of 2019.

It is also most encouraging that despite plans for continued drop in total JGB issuance for the coming year, marking the seventh consecutive year that government’s debt financing would drop, MOF looks to boost issuance of its longer dated paper, heeding the calls from Mr. Kuroda who openly called for such an action back in November. As we noted then, we thought this strongly implied that the BOJ governor wants to see MOF helping the central bank in its efforts to steepen the yield curve while encouraging the government in locking into lower rates for its future financing. It is thus good to see a more co-ordinated economic policy in Japan between key policy makers for a change. 

We think BOJ looks set to taper its ETF purchases in 2020
BOJ had another major surprise in store last week, announcing that it will start lending its ETF hoard to other banks and financial institutions. Like its oversized JGB purchases as part of its aggressive QE program, we have argued that BOJ’s ETF purchases have been equally ineffective in raising inflationary expectations and just like its intervention in the government bond market, these ETF purchases have also led to major distortions in stocks and have drained liquidity. 

We think the recognition of this policy failure, underlined by its newly announced lending program will likely to lead to the central bank tapering its ETF purchases in 2020, especially those linked to Nikkei 225. With Topix index being revamped to better reflect the importance of more profitable and liquid names, we reiterate our October call that the time has come to long Topix and short Nikkei 225 as a low risk quarterly pair trade, targeting their respective index futures as we believe years of the Nikkei index outperforming the broader market is coming to an end. We would like to highlight our weekly publication dated 6th of October which was partly dedicated to this very important potential trend reversal: https://asymmetric-advisors.com/06-10-2019/

Finally, on behalf of everyone here at Asymmetric Advisors, we would like to wish all our readers and clients happy holidays and a prosperous 2020. Our next weekly publication will be issued on the 5th of January.