Allian expects the Bank of Japan to announce a reduction in bond purchases and an increase in interest rates at its July meeting. The Bank of Japan will set a path for reducing bond purchases, adjusting the scale of bond purchases in line with market expectations to avoid disorder. Allian continues to be bullish on the Japanese stock market due to the long-term structural factors in Japan and the support from global growth.
Allian points out that the uncertainty of potential interest rate hikes is large due to the limited guidance from the Bank of Japan, but the recent data is solid enough for the Bank of Japan to exit zero interest rate policy before the external environment changes. The upper limit of interest rates is expected to be raised to around 0.25%. Considering the current inflation level, which is severely negative in real terms, the market should be able to fully digest this rate hike.
Although the market is concerned that the rise in interest rates may have a negative impact on consumption, it is also important to stabilize the yen and prevent further depreciation of the yen to stabilize consumption and market sentiment. However, the yen's ability to appreciate significantly is still a challenge before there is more evidence of a slowdown in the US economy. Allian expects the Bank of Japan to reduce bond purchases, and the amount of reduction is likely to be significant, with the possibility of reducing bond purchases by 30-40 trillion yen per month in the next two years to encourage investors to reinvest in the market.
In addition, Allian has a cautious view on Japanese government bonds and believes that the current price has already largely reflected the changes that are about to happen, so it may adjust the position of Japanese government bonds to neutral in the short term.