BlackRock, the world’s largest asset manager, currently managing a mind-boggling $10.1 Trillion, has cut down its outlook on the Japanese equity space to “underweight.” This decision comes after confirmed talks of the Japanese government’s appointment of a new Central Bank Governor.
Global markets are closely monitoring this appointment. This new governor appointment brings in a 180-degree turn on the interest rates’ point of view of the Bank of Japan. To date, the Bank of Japan has maintained its decade-old dovish stance keeping its interest rates at the minimum. But the new anticipated governor Masayoshi Amamiya is expected to turn hawkish to match shoulders with its global counterparts. They all have the same nightmare of high inflation and are battling them by raising interest rates, except Japan.
The research wing of BlackRock said that they had downgraded Japanese stocks because they looked at policy mismanagement and problematic economic conditions. They released the statement in a well-timed manner, which was right before the Japanese government was going to present the list of suitable candidates for the post of governor in the parliament for approval.
The research wing further added that in the upcoming days after the appointment, BoJ might reverse its decision on yield curve control, which will, in turn, increase global yields and reduce risk-taking capabilities.
BlackRock further added that the scepticism of monetary policies and the interrelationship of the Japanese economy with recession-type scenarios in other major economies had paved the way for their decision.
Declining estimates of earnings growth have hinted towards the gloomy days for the Japanese economy.
A report released on Tuesday, February 14, reported the expansion of the Japanese economy by 0.6 per cent in the last phase of the financial year 2022-23. It has technically beaten the recession, but the market confidence does not favour revival.
Last December, the Bank of Japan sent shockwaves across the globe by easing on its yield curve control policy. The global yields surged 25 basis points above and below 0% to 50 basis points.
The US treasury yields also witnessed a massive jump, with the 10-year note rising 7 basis points and the 30-year note rising 8 basis points. Its peers, the European government bonds and German 10-year bunds, also felt the heat.
The relative hyperinflation hit Japan’s core consumer price index and touched its high of the last 41 years last December.
BlackRock has presented different outlines for supporting its view for the BoJ to move to a hawkish setup.
Firstly, the Bank of Japan may again stretch the range of its yield curve control further from the current 50 basis points. The 10-year Japanese Government Bonds have already breached their limits. It has been very close to the upper band ceiling of 0.5 per cent for a very long period.
Secondly, the Bank of Japan can play totally out of the box and strike a yield curve control policy.
According to BlackRock, these would mean an increase in yields and a surge in the volatility of interest rates. The scrapping of the policy will also prevent the central bank from buying up the bonds; more than half of all the liquid Japanese Government Bonds are owned by the central bank.
The Bank of Japan bought JGBs worth 23.7 trillion yen ($182 billion) in January, according to reports released by Nikkei.
Global domino effect
The responsibility of the Bank of Japan as the central bank of one of the world’s major developed economies is significant. Any changes to the monetary policies will drastically impact the global markets.
A contraction in the global bond yields market of the developed nations will increase risk sentiments across the globe. The situation could worsen if the Japanese bond investors start offloading from their foreign bond portfolio.