Markets respond positively to upbeat outlook

In currency markets, the Japanese yen retreated against the US dollar over Q2. This came as the Bank of Japan’s (BoJ) new governor, Kazuo Ueda, remained supportive of the central bank’s long-running ultra-easy monetary policy stance. The governor, saying in April that the BoJ would “patiently” continue with accommodative policy settings, implied it was too early to change course by announcing a policy review which is expected to take between 12-18 months.

Annual inflation rose to 3.5% in April from a six-month low of 3.2% in March, with food prices continuing to increase. More encouragingly, inflation fell in May to 3.2% when it had been forecast to rise. The economy grew 0.7% quarter on quarter in the first quarter of 2023 which was more than forecast and higher than the 0.1% expansion in the previous quarter. A reduction in sales to China held back the country’s exports which only rose 0.6% on an annual basis in May, albeit higher than expected, after increasing 2.6% in April.

The Japanese equity market responded positively to the BoJ’s decision to leave its short-term negative interest rate of -0.1% unchanged in June. Furthermore, the central bank’s policymakers predicted a slowdown in inflation and a continuation in monetary easing.

Brooks Macdonald’s view

We have a neutral outlook for Japan equities. Market performance has been supported this year by hopes that after years of false dawns around stock market reforms in particular, we might have finally reached a tipping-point. Of particular note, for Japanese listed companies with a market price below the book value of their net assets, the Tokyo Stock Exchange has earlier this year tasked them to ‘disclose policies and specific initiatives for improvement’. Balancing hopes for better corporate governance and capital allocation, Japan still has well-documented structural headwinds: high public debt levels and a declining and aging population. These provide an unwelcome backdrop for the Bank of Japan as it might look to unwind decades of unconventional monetary policy, following which the central bank owns around half of the Japanese government bond market.