Call to ‘Buy Japan’ is premature, Bank of America analysts say

As Japanese stocks rose to the highest levels in three decades, Bank of America strategists forecast the nation’s currency to weaken further from current levels.

While the Bank of Japan’s extremely dovish monetary policy is in stark contrast to global peers that have maintained high interest rates, strategists say the approach to buying Japanese stocks, as well as the yen, could be one for next year, not this year.

The term “Buy Japan,” which is used to call on investors to buy Japanese stocks and the yen, is “premature,” according to equity and rate strategists including Shusuke Yamada and Tony Lin.

The call to buy Japan stocks and the yen may be a “potential turnaround for 2024,” the strategists said in a Monday note. However, it is “subject to confirmation of a virtuous inflationary cycle in Japan and the government’s policy to promote domestic capital spending and FDI inflows.”

Inward foreign direct investment refers to investments made by a foreign entity in another country, in this case Japan. By contrast, outward FDI occurs when a Japanese company expands its operations to a foreign country. They include cross-border mergers and acquisitions and investments in startup projects abroad.

The latest data from Japan’s Ministry of Finance showed international investors bought 867.5 billion yen ($6.2 billion) net worth of Japanese stocks in the week of May 14-20, a sharp drop from 2.4 trillion yen seen in the first week of April.

Pointing to a notable deficit in Japan’s foreign direct investment, indicating that the amount of outward FDI exceeds the amount of inward FDI, BofA expects the Japanese yen to weaken further to 143 against the US dollar by the third quarter of this year. anus.

He japanese coin it weakened to 139.7 against the dollar on Thursday afternoon.

Bank of America expects the BOJ to maintain its negative interest rate policy and yield curve control framework until the second quarter of 2024.

While the Bank of Japan’s monetary stance to keep interest rates very low is good news for stocks for now, it would mean further pressure on the yen as global central banks continue to raise rates to tame inflation.

“Japan’s delayed cyclical recovery and the BoJ’s distinctively patient stance are positive for Japanese equities and negative for the JPY,” they wrote.

Japan’s central bank sticking with its current monetary policy stance, plus its FDI shortfall, would be the main factors behind a weaker yen.

“Buying Japanese stocks still at a fair value, funded by JPY, may be an attractive carry trade,” the BofA strategists wrote. “If this trade picks up, a negative correlation between the JPY and Japan stocks may emerge as foreign investors need to adjust currency hedging on stock market fluctuations.”

A carry trade is an investment strategy that involves borrowing at a low interest rate and reinvesting in an asset with a higher rate of return.

A recovery in Japan’s current account surplus due to lower oil prices and the return of tourists visiting Japan could boost the Japanese yen over the year, the strategists said, adding that it would not make up for the shortfall in investment. outgoing foreigner.

“We don’t think this is enough to correct the undervaluation of the yen, as Japan’s FDI deficit remains large and the Bank of Japan does not seem willing to raise interest rates any time soon,” they said.