In
its
last
policy
meeting
for
the
year,
the
Bank
of
Japan
kept
its
ultra-loose
monetary
policy
unchanged.
While
the
meeting
cycle
is
closed
for
the
year,
whether
the
inflation
momentum
in
Japan
can
be
carried
over
to
the
new
year
is
still
to
be
seen.
Meanwhile,
the
market
is
watching
the
spring
wage
negotiations
that
kick
off
in
January,
and
the
impending
pivot
to
rate
cuts
in
the
US.
Experts
told
Morningstar
that
inflation
will
remain
a
central
piece
in
the
BoJ’s
decision
to
adjust
rates.
The
spring
wage
negotiations,
or
‘shunto’,
would
serve
as
guidance
about
consumer
prices
and
policy.
Specifically,
if
the
gauge
remains
close
to
or
above
2%,
it
could
be
likely
that
the
central
bank
will
remove
the
negative
interest
rate
policy.
The
inflation
come
after
almost
three
decades
of
close-to-zero
price
changes.
According
to
Morningstar
estimates,
the
level
of
consumer
prices
in
Japan
in
mid-2022
was
only
8%
higher
than
three
decades
earlier,
meaning
that
average
annual
CPI
inflation
had
been
just
0.2%.
Aadish
Kumar,
international
economist
at
T.
Rowe
Price,
thinks:
“Our
base
case
scenario
is
that
it
will
terminate
the
current
negative
interest
rate
policy
in
April
2024
to
coincide
with
the
annual
wage
negotiations.
This
is
also
the
time
when
the
BOJ
will
include
the
fiscal
year
2026
in
its
forecasts,
providing
an
additional
year
of
forecasts,
where
the
BOJ
can
signal
rising
confidence
in
higher
inflation.”
On
the
other
hand,
also
because
of
a
lack
of
inflation
in
the
past
three
decades,
Kumar
says
there
is
no
immediate
urgency
for
the
Bank
of
Japan
to
change
its
accommodative
stance.
Unlike
other
major
economies,
he
thinks
Japan
doesn’t
have
the
excessively
high
inflation
that
forced
interest
rates
to
climb
to
multi-decade
highs.
The
other
key
decision
facing
the
Bank
of
Japan
is
the
timeline
to
remove
its
yield
curve
control
(YCC)
policy.
“While
this
could
happen
as
early
as
December
this
year,
the
YCC
policy
has
already
been
gradually
winding
down,
with
the
parameters
of
the
10-year
yield
cap
being
loosened
toward
the
point
of
becoming
irrelevant,
as
evident
when
the
BOJ
recently
loosened
the
yield
cap
from
a
strict
1%
limit
to
a
more
flexible
‘reference’
rate,”
Kumar
adds.
Should
some
macro
shifts
arrive
in
the
first
part
of
the
new
year,
what
does
it
mean
for
the
Japanese
yen
and
domestic
stocks,
which
went
in
different
directions
in
2023?
Yen
Appreciation
is
Expected
to
be
Mild
In
2023,
the
Japanese
yen
was
cheap
relative
to
many
other
currencies,
making
the
country’s
exports
attractively
priced.
So
far,
the
effect
has
been
seen
most
quickly
in
inbound
tourism
receipts,
which
are
considered
as
part
of
exports
in
GDP
figures
on
official
data.
The
improving
economy,
cheap
yen,
and
strong
export
performance
have
boosted
the
case
for
Japanese
equities.
Looking
ahead,
Keiko
Kondo,
head
of
Asia
multi-asset
investments
at
Schroders,
forecasts
the
yen
to
strengthen
against
the
euro.
In
her
words,
a
yen
appreciation
in
2024
would
be
soft
and
gradual,
rather
than
aggressive.
For
the
yen
to
strengthen
significantly,
Kondo
says
there
are
two
potential
drivers
to
watch.
“[That
is]
dollar
interest
rate
coming
down
and
yen
interest
rate
going
up.
The
interest
rate
on
the
yen
would
probably,
in
my
view,
go
up,
but
to
such
a
small
magnitude.
That
alone
is
not
going
to
be
really
driving
the
yen
stronger.”
She
managesthe
Bronze-rated
Schroder
China
Asset
Income
fund
and
Neutral-rated
Asian
Asset
Income
fund.
Corporate
Governance
and
Currency
Risk
If
the
yen
appreciation
turns
out
to
be
strong,
Japanese
stocks
may
struggle
Wary
of
the
potential
impacts,
Schroders’
Kondo
says
her
bullish
call
for
Japanese
stocks
could
change
some
time
during
2024.
“Japanese
stocks
are
not
necessarily
the
thing
that
I
want
to
be
betting
as
a
whole
one-year
view.
But,
I
feel
it’s
a
bit
too
soon
to
be
going
short
Japanese
equities,”
says
Kondo.
She
points
to
the
performance
drivers
for
the
asset
class
in
2023.
“So
far,
80%
of
the
reason
for
the
Japanese
equities
doing
well
in
the
local
currencies
terms
is
the
yen.
The
other
20%
is,
of
course,
the
governance
story.
I
think
the
story
around
the
governance
is
actually
a
strong
one
so
far.
But,
it’s
a
slow
burner,
in
the
sense
that
[corporate
governance]
alone
is
not
going
to
drive
the
market
higher.”
A
moderate
upside
in
the
currency
will
not
cause
much
trouble
for
the
equity
market.
But
as
the
interest
rate
gap
between
the
US
dollar
and
the
Japanese
yen
shrinks,
the
export
environment
worsens,
dragging
stock
performances.
“That
will
be
a
terrible,
terrible
combination
for
Japanese
[equities],
no
matter
how
much
you
might
go
there
and
spend,”
Kondo
adds.
In
terms
of
valuation,
T
Rowe’s
Kumar
suggests
being
cautious
with
value
names
in
Japan.
That
include
the
export-heavy
names,
such
as
the
large,
multinational
auto
companies
and
manufacturers.
They
benefited
greatly
from
their
increased
competitiveness
amid
a
cheap
yen
environment.
He
says:
“This
has
also
meant
that
value-oriented
companies
have
powered
the
market,
significantly
outperforming
their
growth-oriented
counterparts.
The
swing
toward
value
and
away
from
growth
in
Japan
in
recent
years
has
been
significant.”
As
this
differential
between
value
and
growth
stocks
looks
increasingly
stretched
versus
its
historical
level,
he
suggests
that
growth
companies
and
more
domestically
focused
businesses
are
likely
to
turn
around
in
2024
from
their
respective
depressed
valuation
levels.
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