Japanese Stocks Outlook Following Yen's 34-Year Low

Ben seen a bit of a pull back in the Nikkei today. But if we look at the broad sweep of things, we have a chart on the Bloomberg that shows just how much the Nikkei has outperformed pretty much every other market by a really, really wide margin. So when you see a pull back like this, this, this is an opportunity to get in. Hi, good morning. Great to be with you. Yes. We at the Black Rock Investment Institute, we’ve been overweight Japanese equities for a few quarters actually, but we upped that conviction, taking our overweight even higher because we continue to believe that the combination of the, if you like, the macro story, the nominal GDP boom versus a decade or two of deflation will continue. And importantly, the BOJ is not derailing that. So the macro story continues and then of course as well as that we have the bottom up corporate governance revolution if you like, which I think we’re going to continue to see more and more news flow on be that buybacks, dividends, be that unwind of Cross holdings. So that combination we think is very constructive. We still think global investors don’t have enough exposure. So we have Black Rock overweight. How about the yen though because we’re hovering around 34 year lows at the moment. We’ve got those usual sounds that we’ve come to expect from the Ministry of Finance and the FX currency chief about the risk of intervention, Where do you see intervention potentially happening and how does that affect your your case for the for Nikkei bullishness, yeah, so we would actually be exposed to Japanese equities on an unhedged basis. So clearly we have some sort of short term very exciting situation with the Ministry of Finance potentially continuing to verbally intervene trying to create something of a a line in the sand. I guess on almost any measure, the yen looks like a very, very cheap currency. So over the six to 12 month horizon, which is how we think about our tactical asset allocation views, we think the yen can actually appreciate meaning that global investors won’t be kind of inconvenienced by a weak yen derailing their local equity market gains. So we think this is a different Japanese story. It’s much more to do with Japan meaning Japan, IEA, Japan domestic economic economic renaissance benefiting local companies I guess be those banks consumption, it’s not so much a weak yen helping the very excellent Japanese exporters. It’s much more to do with Japan, meaning Japan and actually a a yen moderation or even a little bit of a strengthening shouldn’t derail. That’s more, how can I say localized Japan view. To what degree though is this also a strong dollar story? And with that in mind, how effective could you see any intervention being? Yeah, I think you’re right. So I think Wallace comments obviously are somewhat more hawkish. Although importantly it’s still, I think key to note, even Wallace comments are still talking about the pace of cuts. So there’s no discussion really about are we going to cut or not. The answer to that seems to be yes, the Fed is going to cut. The debate is when and by how much. So I think you know as we get to June, likely we start to see a cutting cycle which should take some of the heat out of the dollar strength that we’re definitely seeing right now. And again that should be beneficial. Clearly as we have the the Fed beginning there cutting cycle as the BOJ very, very carefully continue there, very careful hiking cycle that interest rate differential should narrow, meaning the yen should find some strength, not too much but some strength in the months in the months ahead. Well, we’re counting down to another important piece of data out of the US for the Fed. It is of course the PCE deflator, It’s it’s going to come out while the Asia Pacific’s on holiday. What are you anticipating around that because we have seen a few surprises that we didn’t expect and expectations for for easing from the Fed have gone from something like 7 cuts now down to three. Do you think that maybe those expectations could end up getting tweaked again? But the market has obviously come back much more in line with, with our view now with only three cuts, some really three cuts priced for the year. That makes sense because these, let’s call them surprises, we don’t find them that surprising. We think you’re going to see more and more of this kind of inflation, roller coaster uncertainty and volatility that’s going to continue to create a different macroeconomic regime, a less certain one, more volatile markets. So we think this is going to continue critically. What’s been I think very important for for markets is the Fed’s relative comfort with this over the last couple of months. I mean inflation has surprised to the upside and yet Powell and other senior Fed members have been broadly OK with this. So it seems like we’re getting something of a goal post Glide where the Fed is implicitly accepting inflation can be OK at let’s say a range of 2 to 3% rather than a kind of very clear we must get to 2% at any cost. So this goal Post Glide I think has been maybe the most important thing in financial markets over the last month or two as the Fed has tolerated even slightly surprisingly higher inflation prints for the last couple of months. Just before I just want to get back to Japan briefly before we move on. We do have an enormous balance sheet for the Bank of Japan. It’s going to need to exit the ETF market as well. What’s your risk scenario around those two things? So I think the, the Bank of Japan is extremely conscious of this risk and I think they have gone extremely out of their way appropriately to manage this risk. And This is why the BOJ has been, to my ears at least, so clear that they’re going to be very, very slow, very marginal, give the market extreme guidance about what’s going to happen so as not to take anyone by surprise. So I think the interest rate risk obviously is there. There’s a lot of debt. If interest rates went up a bit quick, for sure it would be inconvenient. But I think it’s important we all recognize the BOJ fully, fully understands that and he’s doing everything they can to mitigate that risk. And I think they have got the firepower, yes, they kind of abandoned yield curve control last week, but they said very clearly if they need to bring it back, they can and they will.