Big breakout in Japan banks and insurance stocks as hopes rise for a BOJ pivot

The year-end US stock market rally continues as growing anticipation of less aggressive rate hikes from December onwards is forcing underweighted equity funds to put money to work or risk a major under-performance should the rally continue in December. This has been our argument for a Santa Claus rally which we think ultimately sets the stage for another big correction in stocks next year given weakening corporate earnings outlook and weak consumption picture evident by what looked to have been an anaemic black Friday shopping activity. 

In our market in Japan, stocks have followed the rebound in the US with the broader market index, Topix breaking above its crucial resistance line of ¥2000, marking its highest level since January of this year and now in positive territory YTD in local currency terms. However, it should also be noted that even after the recent yen rebound, Topix is still down by over 16% YTD in dollar terms, slightly underperforming S&P and underlining the extent of yen’s weakness we have witnessed this year mainly due to BOJ’s policy errors which we have numerously addressed.

What seems to have become increasingly evident is that rising inflationary pressures in Japan is heightening expectations of a major BOJ pivot from its ultra-loose monetary policy as we get closer to next April when Mr Kuroda’s ten-year reign as BOJ’s governor comes to an end. Nowhere this is more evident than by looking at shares of banks and insurance sectors which we have been strongly recommending throughout this year as big beneficiaries of rising rates. Both these sectors staged a major breakout last week, having respectively risen by over 20% and 23% YTD.  

Rising expectations of a BOJ pivot are also evident by the most recent rebound in super long dated JGB yields which seem to have broken their correlation with the dollar/yen rate. Although yen has regained some ground, partly due to the dollar weakening against all major units due to growing expectations for narrowing interest rate differentials, one senses that the rebound in the yen is also being helped by hopes of BOJ abandoning its yield curve controls by Q2 of 2023, when a new governor replaces Kuroda.