In the first half of this year, the long-dormant Japanese stock market soared, with the Nikkei 225 index reaching a 33-year high. However, as Japan's inflation rises, the possibility of the Bank of Japan turning hawkish threatens this trend.
Now, as the shoe drops, the Bank of Japan has decided to exercise &#34;greater flexibility&#34; in yield curve control, raising the fixed interest rate for purchasing Japanese government bonds from 0.5% to 1%.
When asked if the Bank of Japan would abandon its Yield Curve Control (YCC) policy, Bank of Japan Governor Haruhiko Kuroda stated that adjusting YCC does not change the Bank of Japan's accommodative stance. The market interprets this as ruling out the possibility of revising YCC in the near future.
In response, Nomura Securities pointed out in its latest report:
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This move somewhat weakens the market's dovish view of Kuroda. For the Japanese stock market, if investors unwind their long positions in index futures, the Nikkei 225 index could fall to 31,000 points.
However, in the long term, even considering the Bank of Japan's policy adjustments, the fundamental situation of the Japanese stock market is unlikely to undergo significant changes. We predict that by the end of December 2023, the Nikkei 225 index will rise to 34,000 points, assuming that the yen will strengthen to 130 against the US dollar by the end of December.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/29c91157-42f6-498d-9284-8e84b1e8aaae.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Chart" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/29c91157-42f6-498d-9284-8e84b1e8aaae.png"/>
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Nomura lists three reasons to support this view:
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The market now has a broader awareness that adjusting YCC will not directly lead to an increase in key short-term interest rates (-0.1%). As the rate hike cycles in the US and Europe appear to be in their final stages, there is less upward pressure on interest rates from overseas.
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The rise in nominal Japanese government bond yields is accompanied by an increase in inflation expectations, while real yields remain in negative territory.
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In addition, with the Bank of Japan introducing greater flexibility in the upper limit of 10-year government bond yields, in terms of the risk of the Bank of Japan taking hawkish action, many believe that this may be the last bad news for now.
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Nomura predicts that by the end of 2023, the Nikkei 225 index will rise to 34,000 points, and the yen will strengthen to 130 yen per US dollar.

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