BlackRock Investment Institute cut Japanese stocks to “underweight” on Monday, saying that a Bank of Japan (BOJ) policy change away from its “ultra-loose” monetary strategy could push global yields higher and reduce risk appetite.
Japanese inflation has reached four-decade highs on a weaker yen and higher energy prices, and “crucially, that’s now feeding into higher wages,” BlackRock said. “We think that paves the way for the BOJ to roll back policies that by its own measures may have achieved their goal: to foster a sustained rise in inflation toward its 2% target that is underpinned by wage growth.”
Japan’s government is likely to appoint academic Kazuo Ueda as the next Bank of Japan governor when Haruhiko Kuroda’s second term ends in April, a surprise choice that could finally align the country with other major economies in raising interest rates.
“Regardless of who takes over, we think the wage and inflation dynamics at play mean the current policy stance has likely run its course,” BlackRock said, noting that policy changes could include the BOJ widening its band on the 10-year bond yield target again, or abandoning yield curve control.
The implications are likely to be global and “we see the jolt from a BOJ policy shift as another driver of higher term premium, or the compensation investors demand for holding long-term government bonds,” BlackRock said, adding that the risk of further global yields increases could dampen global risk sentiment.
Monetary policy and Japan’s economic sensitivity to slowdowns in other major economies spurred the downgrade, BlackRock said. “Declining earnings growth estimates already reflect some risks from slowing growth –we expect Japan’s export sector to suffer,” it added.
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