BOJ’s dovish tone suggests a more positive near-term Japan stock market outlook
Stocks bounce on global risk-on mode while BOJ turns more dovish
Dollar/yen rate rebounded from its 140 support line last week despite the Fed’s 50bps rate cut which we thought was prudent given that the US central bank wants to be seen to be ahead of the curve while guiding for more easing before year-end. Although BOJ left its monetary policy unchanged which was largely as expected, we were somewhat surprised by the BOJ governor, Ueda-san’s more dovish tone which may suggest that he is not too pleased with the pace of the yen’s rapid appreciation since mid-July as many of Japan’s exporters and multinationals may have to guide down their earnings expectations on forex alone, not to mention, weaker demand from US, EU and China.
As we noted last week, much of the coming narrowing of interest rate differential between the US and Japan is likely to come from easing policy of the US Fed while at this stage it seems far too early to expect a more aggressive tightening by BOJ which we think will take its time to tighten its policy, possibly raising the rates by no more than another 25bps before year end. As we also underlined, at the current exchange rate, there is little pressure on Japan’s central bank to act as import prices are easing with the stronger yen, also helped by lower commodity prices and easing shipping freight rates. Moreover, there now seems little concern regarding longer term rates spiking in Japan as domestic institutional investors look poised to allocate more of their assets to JGBs, especially as US treasury yields head below 3.5%.
Given BOJ’s more dovish tone following Fed’s more aggressive easing, we now think $¥ is more likely to hover around 140 level rather than fall towards 130 level by the year-end which is what we had earmarked earlier. We thus think that Japan stock market’s near term outlook has improved somewhat, especially given the broadening rally in the US market. Given the above we would now suggest a more neutral stance in L/S portfolios rather than a net short position we’ve have been calling for in the in the past few months.
Chinese techs looking too attractive to ignore
Although our remit remains solely focused on Japan, from time to time we underline some of the glaring opportunities we see in other Asian stock markets which we follow more closely. One example has been TSMC (2330) which we have been recommending Asian stock funds to buy aggressively since May 2023 when it became more than obvious that its under-performance vs other AI plays in the US and its low valuations which still holds true today leave it highly attractive given its dominance in cutting edge chip manufacturing.
Similarly, China’s top technology names which have all been engulfed in the country’s broad derating in the past three years are also showing much promise for the medium term investment horizon. These companies generally have very strong balance sheets, extremely low valuations, have been restructuring their operations to better cope with weak Chinese economic activity and have begun aggressively buying back shares. These HK listed names include Alibaba (9988), JD.Com (9618), Tencent (700) and Baidu (9888). Although not necessarily in the same category, we are also hugely impressed with the Chinese battery and auto maker, BYD (1211) which we would rather buy and hold than any of Japan’s car companies currently.
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