Allianz Global Investors: Moderately positive on the yen and Japanese stocks
2min read On Japanese equities, Allianz said its view remains moderately positive, as structural domestic drivers remain in place and global economic growth is satisfactory. However, some volatility in the short term is likely as political uncertainty remains, until the market regains confidence that the overall policy direction will not change significantly. While the firm's view on Japanese equities is moderately positive, its confidence in other equity markets is stronger.
Greg Hirt, chief investment officer of Allianz Global Multi-Asset, said that the recent economic data confirmed the Bank of Japan's policy stance. While the conditions for further hikes remain, the Bank of Japan's comments suggest that there is no urgency to adjust rates at the October meeting. In the firm's view, there are two main reasons.
First, Mr Hirt said, the Bank of Japan would like to confirm the economic trends in the US and Japan. With the start of Japanese companies' fiscal year in the second half, the October consumer price index (CPI) will provide important information on corporate pricing behaviour. Moreover, more specific information on the target of next spring's wage negotiations will be announced. Japan's largest union, Rengo, has announced plans to seek at least 5 per cent wage growth in next year's wage negotiations. Meanwhile, stable economic data in the US could also provide further support for the Japanese economy.
Second, he said, political uncertainty remains high. The loss of the majority in the lower house of parliament in the election has made the formation of the next government more complex, as it needs to form an alliance with other parties to continue to govern. The US election will also take place next week, with high uncertainty on policy direction and market reaction. Given these risks, the Bank of Japan may choose to wait until December, when the outlook becomes clearer.
Allianz expects the next rate adjustment to be in December or January, depending on the election result, economic development and the yen's performance. The recent depreciation of the yen may prompt the Bank of Japan to act more quickly to prevent the risk of renewed inflation expectations from weakening the currency. The economic outlook report in October may provide important insights and is likely to address the recent weakness in the yen.
Yield curves have been repriced recently. While there is still room for further upward movement in the cycle, the expected pace of movement is likely to slow and the distribution of risks becomes more even. Therefore, in the current market environment, Allianz maintains a neutral view on Japanese bonds. For the yen, the firm maintains a moderately positive view. Although the yen's trend has turned negative again, the attractiveness of valuations and the narrowing of yield differentials still support Allianz's positive view on the yen's long-term prospects.
