Japan entered a new era April 9 when Kazuo Ueda was sworn in as its central bank chief, succeeding Haruhiko Kuroda, who had held the post for 10 years. It could be a good era for the world’s No. 3 economy.
For most of the world, inflation is an evil to be dreaded, and fought to the death by central banks raising interest rates. In Japan, after decades of deflation, it’s more like manna that policy makers have been vainly begging from heaven. Kuroda was high priest of this effort, holding rates at zero and expanding quantitative easing, while global colleagues energetically tightened.
Inflation has come at last to Japan, with import-driven price rises running over 3% annually. “This is the first inflation I’ve seen in 23 years in Japan,” says Archibald Ciganer, the portfolio manager for Japanese equities at T. Rowe Price. “Reflation would be a day and night difference.”
Markets expect Ueda, an academic economist with a Massachusetts Institute of Technology Ph.D., to alter Kuroda’s ultradovish course, gradually. “
BOJ
is not in a hurry to start policy normalization,” says Masamichi Adachi, the chief Japan economist at
UBS.
A little policy action could go a long way, however, with the central bank holding half of Japan’s $8 trillion bond market. Any tightening should bolster the yen and curtail liquidity to global markets. “Easy money leaking out of Japan has been one of the reasons why markets elsewhere have been able to defy gravity,” says Michael Kelly, head of PineBridge Investments’ multiasset strategy.
While other central banks content themselves with adjusting prime rates, the Bank of Japan also imposes “yield-curve control,” limiting the spread between prime and the yields on bonds of various durations.
Investors look for Ueda to tinker with this system first, raising the band for 10-year paper from 50 basis points, or a half-percentage point, to 75 or 100. Aaron Hurd, senior currency portfolio manager at State Street Global Advisors, predicts that the shift could happen at a June BOJ board meeting. UBS’ Adachi sees Ueda waiting until the picture for a U.S. recession is clearer.
Both agree that monetary tweaks should make Japanese bonds more attractive, strengthening the yen. Adachi’s target is 120 to the dollar, up from 132 now. “The yen is one of our favorite currencies,” Hurd concurs.
The outlook for Japanese equities is cloudier. With an index dominated by mega-exporters like
Toyota Motor
(ticker: 7203.Japan) and
Sony Group
(6758.Japan), stocks tend to weaken as the yen strengthens.
T. Rowe Price’s Ciganer looks to buck that headwind by owning conglomerates that are rationalizing their holdings, like
Hitachi
(6501.Japan), or raising their governance game, like
Seven & I Holdings
(3382.Japan), the parent of the U.S. 7-Eleven chain. He’s also finding growth companies in a market better known for value, such as air-conditioning giant
Daikin Industries
(6367.Japan) and electronics powerhouse
Keyence
(6861.Japan).
Neither Ciganer nor Kelly are following
Berkshire Hathaway’s
(BRK.A, BRK.B) Warren Buffett, who this past week revealed a multibillion-dollar expansion of his investments in five Japanese trading houses, led by
Mitsubishi
(8058.Japan) and
Mitsui
(8031.Japan).
These company’s assets are largely outside Japan and tilted toward commodities, a risky bet as the world economy cools, Ciganer says. Their big advantage is cheap borrowing in Japan, which may become less cheap soon. “Buffett spotted the era of free money coming to a close,” Kelly says. “He locked in some in the last place where it’s still available.”
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