Reasons for the recent rally
The last two-week rally was primarily led by top-cap stocks amid weakness in the Japanese yen and rising long-term interest rates in Japan.In fact, the Bank of Japan’s (BoJ) decision at the Monetary Policy Meeting (MPM) in June to un-change the policy rate of 0-0.1% and to make a detailed plan to reduce the Japanese government bond (JGB) purchases by the next MPM in July2 reduced expectations for early monetary tightening, sending the Japanese yen lower, below the 160 level against the US dollar.At the same time, the market started to price in the quantitative tightening, sending the 10-year Japanese Government bond (JGB) yields higher, above 1%. Against these backdrops, top-cap financial and export-oriented companies were favoured.Outlook
Looking ahead, given the momentum the rally this year, we believe that market could take a pause.That said, we maintain a constructive view on the Japanese equity market thanks to the ongoing structural changes in Japan. We continue to believe the scope for stock selection is likely to widen, unearthing unique investment opportunities and prompting the rotation into laggards.For the Japanese yen, the exchange rate is admittedly subject to the US inflation and the resultant US Federal Reserve’s (Fed) path on interest rate cuts. The higher-for-longer situation has put substantial downward pressure on the Japanese yen so far, but we continue to expect it to ease later this year.In fact, the BoJ has already started policy normalisation from the unconventional ultra-loose monetary measures amid improving macro backdrops. Also, the US Fed’s monetary policy pivot is finally coming into sight of us. This could lead to a strengthening of the Japanese yen in the future.At the same time, the yen’s upside risk, which could materially hurt exporters’ earnings, should be limited, considering the current interest rate gap between the US and Japan. The high interest rate scenario like the US is also unlikely given the level of the consumer price index (CPI) – 2.8% as of May. The recovery of the Japanese yen should ease inflation pressure, which currently suppresses household consumption.A long-awaited wage-price spiral reviving domestic demand is coming closer to reality
Furthermore, this year’s influential “Shunto” spring wage negotiations yielded higher wage rises than last year, which finally exceeded the current inflation rates.On the other hand, Japanese companies have been overcoming the deflationary norm. According to the June BoJ’s Tankan survey, Japanese companies have been increasing prices for the last three years. This is almost the fast-ever sustained price hikes for decades.Such norm changes should help Japanese companies to improve margins and sustain healthy earnings growth, allowing them to distribute increasing wealth to their employees. We believe that a long-awaited wage-price spiral reviving domestic demand is coming closer to reality.We also expect the Japanese company’s robust capex trend to continue, given the solid earnings trend combined with the much-needed demand for digital transformation and automation in the ageing society.All in all, Japan is on track for a significant shift from the lost three decades of economic/price/wage stagnation to a normal economic environment with positive growth.At this moment, the market focus concentrates on near-term macro factors, namely rising interest rates and the weakening yen.Towards later this year, we expect investors to eventually try to capitalise on the ongoing structural changes by broadening investment opportunities and looking into individual companies’ fundamentals and competitive advantages.Want to search and invest in related funds?Open the WeLab Bank App and click【Featured Funds】to find out more!
Importance NoticeThis document is for general information only. The information or opinion herein is not to be construed as professional investment advice or any offer, solicitation, recommendation, comment or any guarantee to the purchase or sale of any investment products or services. This document is for general evaluation only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person or class of persons and it has not been prepared for any particular person or class of persons. The investment products or services mentioned in this webpage are not equivalent to, nor should it be treated as a substitute for, time deposit, and are not protected by the Deposit Protection Scheme in Hong Kong.The information or opinion presented has been developed internally and/or taken from sources (including but not limited to information providers and fund houses) believed to be reliable by WeLab Bank, but WeLab Bank makes no warranties or representation as to the accuracy, correctness, reliabilities or otherwise with respect to such information or opinion, and assume no responsibility for any omissions or errors in the content of this document. WeLab Bank does not take responsibility for nor does WeLab Bank endorse such information or opinion.Investment involves risks. The price of an investment fund unit may go up as well as down and the investment funds may become valueless. Past performance is not indicative of future results. WeLab Bank makes no representation or warranty regarding future performance. Any forecast contained herein as to likely future movements in interest rates, foreign exchange rates or market prices or likely future events or occurrences constitutes an opinion only and is not indicative of actual future movements in interest rates, foreign exchange rates or market prices or actual future events or occurrences (as the case may be).You should not make any investment decision purely based on this document. Before making any investment decisions, you should consider your own financial situation, investment objectives and experiences, risk acceptance and ability to understand the nature and risks of the relevant product(s). WeLab Bank accepts no liability for any direct, special, indirect, consequential, incidental damages or other loss or damages of any kind arising from any use of or reliance on the information or opinion herein. You should seek advice from independent financial adviser if needed.WeLab Bank is an authorised institution under Part IV of the Banking Ordinance and a registered institution under the Securities and Futures Ordinance (CE Number: BOJ558) to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.This document is issued by WeLab Bank. The contents of this document have not been reviewed by the Securities and Futures Commission in Hong Kong.