On March 22nd, the Nikkei 225 index opened higher, rising 0.46% to 41005.24 points as of press release, continuing to reach a new historical high, while the Tokyo Composite Index rose 0.7%.
In terms of individual stocks, companies such as Nissan, Honda, Mitsubishi Corporation, and Tokyo Electronics performed actively.
Japan raises interest rates for the first time in 17 years
On March 19th, the Bank of Japan announced the cancellation of its negative interest rate policy and raised the benchmark interest rate from -0.1% to 0-0.1%. This is the first time the Bank of Japan has raised interest rates since 2007, marking the end of an 8-year era of negative interest rates. The Bank of Japan is also the last central bank globally to abandon negative interest rates. In addition, the Bank of Japan also announced the cancellation of the yield curve control (YCC) policy, the purchase of exchange traded funds (ETFs), and the purchase of real estate investment trusts (REITs). However, it will continue to purchase Japanese treasury bond, and the scale is basically the same as before.
Bank of Japan Governor Kazuo Ueda stated that the economic virtuous cycle is strengthening, and the 2% inflation target is expected to remain stable and achievable, which is the main reason for changing monetary policy. In the future, short-term interest rates will be the main policy tool, and it is expected that the financial situation will temporarily remain loose. Whether to further raise interest rates depends on the economic and inflation prospects. Considering that inflation expectations are still far from the target of 2%, it is important to maintain a relaxed environment. It will consider reducing the purchase of treasury bond at some point in the future, and the long-term interest rate is not expected to rise significantly. If necessary, the Bank of Japan will consider a wide range of policy easing options, including tools used in the past. I will not comment on short-term exchange rate fluctuations, but if the exchange rate seriously affects the economic outlook, policy measures will be considered to address it.
How to evaluate the recent performance of the Japanese stock market?
Guangfa Securities stated that the Japanese stock market ranked among the top in the global mainstream stock market from 2023 to 2024, mainly benefiting from the strengthening of three major marginal changes. (1) Japan's victory over deflation, with rising prices driving nominal profit growth for businesses; (2) The difference in relative monetary policy orientation drives further depreciation of the Japanese yen, which helps to boost Japan's exports and enhance the attractiveness of the stock market; (3) The Dongzheng Exchange frequently introduces policies to improve corporate governance, and "daily appraisal" promotes further increase in corporate profitability. In 2022, global funds pursued assets with certainty premium in the "new investment paradigm" formed after the deepening of the anti globalization of the Russia-Ukraine conflict, and "daily special evaluation" became the general trend of global fund allocation orientation.
Dongwu Securities stated that the measure of purchasing ETFs is actually to provide a "bottom" for the stock market. Traditionally, when the Japanese stock market falls by 2% or more, the Bank of Japan will buy exchange traded funds. Considering that the Bank of Japan only purchased three ETFs last year and was unwilling to intervene in the market after last week's stock market crash, signs of its unwillingness to purchase more ETFs have become more apparent. Based on the logic of global comparison and the improvement of corporate profits, the probability of Japanese stocks falling into the abyss of a bear market again is relatively low. In view of this, even if the Bank of Japan ends its purchases of ETFs, the impact on Japanese stocks will be relatively limited.
How to view the future trend of the Japanese stock market?
Zhejiang Securities believes that the monetary policy adjustment of the Bank of Japan will not change the upward trend of Japanese stocks. Firstly, as a low volatility dividend asset on a global scale, Japanese stocks still have defensive functions and allocation value, while the US stock market continues to soar. Secondly, the current fundamentals of the United States remain strong, and if the economy does not land in the future, it will also provide performance support for Japanese stocks (Japanese companies have more revenue coming from overseas). Thirdly, it is expected that the impact of the Bank of Japan's current policy adjustment on Japanese stocks will also be limited. In terms of interest rate hikes, the market has already made sufficient pricing, and the 1-year Japanese bond interest rate has risen from the lowest of -0.08% in January to around 0.08%. The probability of future rate hikes exceeding expectations is limited. In terms of ETF purchases, although the Bank of Japan officially announced the cessation of ETF purchases this time, the Bank of Japan has actually stopped increasing its holdings of Japanese stock ETFs since Q4 2023, with limited marginal impact.
Guojin Securities stated that there may be support in terms of fundamentals and funding, and there is still room for valuation recovery in some industries. Fundamentals suggest that Japanese companies may continue to achieve profit growth in the next two years; In terms of funding, the current allocation of overseas funds to Japanese stocks is not high. 1) Normalization of the Japanese economy may drive a wider recovery of Japanese stock profits; From 2024 to 2025, the Nikkei 225 has an expected profit growth of 67% and 86% for listed companies, respectively. 2) Since 2022, foreign investment has sold a net of 2.7 trillion yen in Japanese stocks, and the current allocation ratio is relatively low; As the reform effect of the Eastern Stock Exchange gradually becomes apparent, the relative attractiveness of Japanese enterprises may further enhance. On the emotional side, the early rise of Japanese stocks was supported by profits, and currently some industries have relatively reasonable valuations, which still have some upward space. Since 2012, the Nikkei 225 has contributed up to 90% of its rise in profits; In the near future, Japanese shares are still supported by the expected upward revision of EPS in the next 12 months. The dynamic P/E ratio is only 22.5 times, far lower than the "foam period" in 1990. From an industry perspective, the quantiles of valuation for optional consumption, healthcare, and other options are only 39.3% and 38.4%, indicating some upward potential.