(Bloomberg) -- The Bank of Japan is likely to stand pat on interest rates for longer in a boost to the nation’s equities, according to BlackRock Inc., which has a high conviction investment view on Japanese stocks.
While investors should be alert to the risk of change at any BOJ meeting this year, the central bank probably needs to wait until price trends are confirmed near the end of 2024, according to Yuichi Chiguchi, chief investment strategist at the Japan unit of the world’s biggest asset manager. This puts the benchmark Topix index on course to set fresh record highs this year, he said in an interview.
“We expect an accommodative environment to continue in Japan,” Chiguchi said. This offers a corporate-friendly condition and boost to the stock market as real rates remain negative, he added.
Investors in Japanese equities, bonds and the yen are on edge ahead of the BOJ’s policy decision on July 31, with a reduction in its bond purchase program widely expected. The focus is also on interest rates, though weak consumer spending complicates the decision as to whether another hike is needed next week, according to people familiar with the matter.
Japan’s economic revival — and the return of inflation — “makes its equity market one of our strongest convictions,” the BlackRock Investment Institute said in its mid-year outlook. The positive view is echoed by Goldman Sachs Group Inc., which recently raised earnings forecasts for the Topix index, and HSBC Holdings Plc, which is adding to Japanese equities.
That contrasts with Schroders, which last month downgraded Japanese equities to neutral as the positive impact of the weaker yen on stocks starts to fade due to rising import costs. That’s leading to signs of a deterioration in sentiment for consumers and smaller companies, it said.
Still, Chiguchi sees stocks as having more room to rise because the BOJ is likely to take a cautious approach to normalizing policy amid an extension of subsidies for power and gas bills for several more months. That puts downward pressure on prices, making it difficult for the central bank to gauge inflation trends, he said.
That said, he noted the possibility that the BOJ will take some sort of action at each meeting, after it met with bond market participants this month to compile plans on a reduction in purchases.
The end of decades of deflation in Japan has reshaped companies’ mindsets with a push from the bourse and activist investors for more efficient use of capital. That’s driven both the Topix, and the Nikkei 225 Stock Average to all-time highs this year, though the yen’s rapid gains in recent days have taken some of the shine off stocks.
“It’s decisively different from the past,” as companies shift from cost-cutting to a strategy of raising prices, which hadn’t been seen under a deflationary economy, said Tokyo-based Chiguchi.
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Among Japanese stocks, companies in the tech sector are attractive as these are well-positioned to benefit from an expansion of generative AI, an aging society, decarbonization efforts and US-China tensions, Chiguchi said. This would include semiconductor-related shares and electronic component names, according to the strategist.
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