Strategists at Morgan Stanley and Goldman Sachs Group Inc. see the Bank of Japan’s tweak of yield-curve control as providing clarity that will support further gains in the nation’s equity market.
Opportunities are “now even clearer,” Morgan Stanley strategists including Daniel Blake wrote after the the BOJ adjustment on Friday to allow the yield on 10-year bonds to trade as high as 1%. The central bank has “successfully added policy flexibility without signaling a tightening cycle,” they added.
Goldman’s Bruce Kirk and Kazunori Tatebe said the “BOJ overhang” appears to have been removed and that investors are likely to broaden their interests across sectors while selectively increasing weightings of large-cap stocks. “The combination of a stabilizing yen and improving corporate governance reform momentum could encourage more foreign investor inflows,” they wrote.
Underscoring the upbeat mood, the Topix rallied as much as 1.7% Monday, extending its advance this year to about 22%. The narrower Nikkei 225 gauge was also up and has surged 27%, outperforming many of its global peers as signs of stable inflation reinvigorate Japanese markets and investors including Warren Buffett boost their equity stakes.
Japan’s bank stocks extended gains Monday, but at a slower pace than the broader market. They had rallied Friday on optimism that profitability would improve as interest rates rise in Japan. Still, Morgan Stanley noted that sustained monetary tightening by the BOJ over next 12 months is unlikely and that further gains in banks may be limited.
Meanwhile, Citigroup Inc.’s Ryota Sakagami wrote that the upside and downside for Japanese stocks be limited because of the balancing impact of inflows of short-term funds to Japan potentially peaking while the US economy remains strong.
(Adds comment from Citigroup in final paragraphs)
