(Bloomberg) -- Traders betting on further recovery in Japanese equities are looking to any steer from the Bank of Japan that may cap the yen’s gains and support exporters.
The yen weakened and stocks rose on Thursday, moving contrary to what some investors had feared after the Federal Reserve’s decisive 50-basis point cut. That makes signaling on Friday from BOJ Governor Kazuo Ueda the near-term key in determining the outlook on the narrowing rate gap between the two economies, after his comments at the last policy meeting sent shock waves through markets.
“All stock investors really care about until the next earnings is the exchange rate,” said Yoshitaka Suda, a cross-asset strategist at Nomura Securities Co.
This sensitivity of the market was clearly reflected by reactions to the BOJ’s surprise rate increase late July, when the currency soared and equities went into a tailspin. Traders are hoping for a different outcome this time. Japanese government bonds are far from pricing in another hike, and the divergence between perceptions and the central bank’s message leaves them exposed.
Japan’s currency slid about 1% to 143.71 against the dollar Thursday morning in Tokyo after breaking through the key 140 level at the start of the week. While it strengthened as far as 140.45 after the Fed’s decision, those gains quickly reversed.
Since the massive selloff in August that sent the Nikkei 225 Stock Average into a bear market, the strengthening yen has been hindering a recovery.
The relative strength index - a measure of the pace of recent price changes - for both the Nikkei and the broader Topix suggest they are close to an oversold area of 30. The 12-month forward price earning ratio for the Topix is at around 13.7, compared with 15.9 in early July.
Read: Ueda Faces Task of Flagging Rate Hike Path While Standing Pat
There’s still a “a sense of fear” that the BOJ might do something after the unexpected hike in July, said Seiichi Suzuki, chief equity market analyst at Tokai Tokyo Intelligence Laboratory Co. “But once that’s proven to be wrong, the resulting calm should make it even clearer to see that Japanese stocks are cheap.”
Meanwhile, sovereign debt risks being buffeted by any hawkish tilt from the BOJ.
“The JGB market is far from factoring in additional rate hikes before the end of the year,” said Eiji Dohke, chief bond strategist at SBI Securities Co. “Given the further reduction in the BOJ’s bond purchases from October, the 10-year yield is likely to test 1%” toward the end of 2024.
The swaps market is pricing in about a 30% chance of an additional rate hike this year, while economists tout December as the most likely month for the bank’s next move.
Read: Swaps Prices Show That Bruised Traders Doubt BOJ’s Rates Signals
Too much yen appreciation - it’s the best-performing major currency this month - may add to the BOJ’s caution in lifting rates again, especially with an upcoming leadership election for the ruling Liberal Democratic Party.
“The FX impact on volatility in Japanese stocks is likely to recede,” said Kohei Onishi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. Any BOJ hikes are likely to be moderate, while the Fed’s dot plot shows further cuts in November and December, he said. “The yen is likely to gradually strengthen but the move itself will get a lot milder.”
The benchmark Topix Index is set to underperform its Asian peers for a sixth month, the longest losing streak since 2007. The inverse relation between the yen and Topix increased after the dollar-yen rate breached 145 in August. That’s a level that many company use to predict earnings, and it raised the risk of downward revisions to full-year forecasts.
Read: Yen’s Rapid Advance Pressures Earnings Once Thought Easy to Beat
Yet it all hinges on messaging from the BOJ, as evidenced by the market’s sensitivity to recent remarks by central bank officials, to determine the yen’s next steps after the FOMC.
“For Japanese equities, it was probably the ideal outcome that there was a large rate cut as expected but the yen didn’t appreciate,” said Rina Oshimo, a senior strategist at Okasan Securities Co. “Since the BOJ decision is expected to remain unchanged, attention is likely to focus on Governor Ueda’s subsequent remarks, but hawkish comments are also likely to be limited due to the market chaos in August.”
--With assistance from Daisuke Sakai, Saburo Funabiki and Winnie Hsu.
©2024 Bloomberg L.P.
