© Reuters. FILE PHOTO: An office employee walks in front of the bank of Japan building in Tokyo, Japan, April 7, 2023. REUTERS/Androniki Christodoulou/File Photo
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By Nell Mackenzie, Carolina Mandl and Summer Zhen
LONDON (Reuters) – The Bank of Japan, long the outlier as other major economies jacked up interest rates to curb inflation, is expected to end its negative interest rate policy soon.
Inflation has exceeded 2% for well over a year and markets anticipate a BOJ shift by April. But uncertainty is high and BOJ Governor Kazuo Ueda said last week it’s too early to conclude inflation was close to sustainably meeting its target.
While Japanese stocks have hit record highs, breaching a peak last seen in 1989, the yen remains weak and the economy slipped into a recession last year.
Four hedge funds shared four ideas on how to trade Japan. Their views do not represent recommendations or trading positions, which they cannot reveal for regulatory reasons.
1/ GRAHAM CAPITAL MANAGEMENT
* Systematic and actively managed macroeconomic funds
* Size: $18 billion
* Founded in 1994
* Key trade: Long Japanese stocks, particularly banks
Graham CIO Pablo Calderini favors mainly Japan’s banks stocks as the BOJ is likely to normalize policy.
Banks are particularly likely to benefit from a steeper yield curve, where longer-dated bonds yield significantly more than shorter-dated ones, said Calderini.
Banks borrow in the short term and lend in the long term, at higher rates. “Japan’s monetary policy has been a headwind for banks and it will become a tailwind,” he said.
An index of Japanese bank stocks is up 22% so far this year, broadly in line with the blue-chip Nikkei.
2/ BLUEBAY ASSET MANAGEMENT
* Macro economic fund
* Size: part of the $432 billion RBC Global Asset Management
* Founded in 2001
* Key trade: short Japanese bonds
Mark Dowding, CIO for BlueBay fixed income, favors shorting Japanese government bonds (JGBs), expecting JGB yields to rise.
“With wage inflation continuing to accelerate, helped by companies delivering strong profits, we see the BOJ raising rates in the coming months and then again as we move through 2024, with cash rates rising to 0.50% by the end of the year,” he said.
The BOJ currently guides short-term rates at minus 0.1%.
It has held off on a policy move, waiting for wages to rise, said Dowding. He expects wages to increase by about 1% after the upcoming March “Shunto wage round,” when Japan’s largest employers announce annual wage settlements.
Ueda has stressed the need to scrutinize more data on the wages outlook.
Japan’s two-year bond yield hit a near 13-year high last week. Still, at just 0.18%, two-year yields are well below U.S. peers.
3/ UNLIMITED FUNDS
* Investment firm replicating hedge fund strategies through ETFs
* Size: $68 million
* Founded in 2022
* Key trade: short yen/long U.S. dollar and long Japanese stocks
Unlimited CIO Bob Elliott reckons Japanese rates will remain near zero given economic growth is struggling to gain momentum.
“Japan will have to run very loose monetary policy for longer than most people expect,” said Elliott.
That means the yen could depreciate further against the dollar, he added.
Conversely, this environment could be good for global Japanese companies with revenues in strong currencies outside the country, as it could boost profits, he said.
The yen is the worst performing currency versus the dollar so far this year, down 6% at around 150 yen per dollar.
4/ Union Bancaire Privée – U Access Long/Short Japan Corporate Governance Fund
* Japan equity long/short hedge fund strategy, market-neutral, governance focused
* Size: Roughly $100 million, part of $160 billion UBP
* Founded in 2020
* Key trade: Long blue-chip Japanese companies, short Japan companies with big China exposure
Zuhair Khan, senior portfolio manager at UBP Investments, believes the biggest and 100 companies will continue to lead the market.
Even after recent gains, foreign investors remain underweight Japan, Khan noted.
“(Many of) these investors are new to the Japan market and thus are focused on the large-cap, liquid, blue chip names,” he added.
Foreign holdings in Japanese stocks reached their highest levels in nine years last year, after three years of net outflows, exchange data showed.
Cash-rich companies targeted by activists would also prove attractive, said Khan, especially if they pursue management buyouts with this excess cash.
Companies reliant on China demand meanwhile would be good candidates for short positions given China’s economic weakness, he said.
