- BOJ ends regime of negative interest rates; world’s last central bank to unwind ultra-loose monetary policy after signs of lasting end to decades of deflation
- Financial conditions to stay accommodative given weak macroeconomic backdrop; structural issues remain with reforms needing years to yield results
- Stay constructive on Japan equities as negative rates benefits Japan corporates given their low debt and high cash levels; bond trading activity should pick up going forward
- Japan’s semiconductor sector, megabanks, and consumer stocks with global exposure remain our preference
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The end of an era. The Bank of Japan (BOJ) has embarked on policy normalisation, ending its negative interest rate policy (NIRP) and abolishing its 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 stem 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.
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. Having cash is no longer 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.
The semiconductor sector remains our convicted sector as the government focus on rejuvenating the sector with the aim of elevating Japan’s worldwide semiconductor manufacturing share to 3% by 2027. We anticipate a ripple effect on Japan’s already robust chip infrastructure. Japan boasts 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 long term potential GDP growth of around 1%. This is due to an ageing population with a shrinking labour force and consumption base. Structural reforms implemented by current PM Kishida will take years before seeing fruits. We focus on big caps quality stocks in Japan which lead in innovation and global presence. These are in economic heavy weight industries such as autos, automation, electronics and electricals. We prefer consumer stocks where earnings are exposed to global consumers.
Figure 1: “Kishidanomics” vs “Abenomics” – more way to go for TOPIX
Source: Bloomberg, DBS
Figure 2: Low debt levels among Japan corporates
Source: LSEG Datastream, DBS
Figure 3: End of negative rates is positive for Japan corporates
Source: Bloomberg, DBS
Figure 4: Rally on Japan banks to continue
Source: LSEG Datastream, DBS
Figure 5: Profits are rising
Source: Bloomberg, DBS
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