Japanese Stocks Rally, Yen Falters as BOJ Rate Hike Bets Fade

The Bank of Japan's (BOJ) recent rate hike has sparked a rally in Japanese stocks, as investors reassess their expectations for monetary policy and the yen's exchange rate. The BOJ raised its interest rate target to 0.25% last week, the highest in 15 years, driving a yen surge to about 141.66 against the dollar on Monday. However, the yen has since paring some gains in later sessions.

The BOJ's rate hike policy has had a significant impact on the yen's exchange rate and foreign investors' decisions to buy or sell Japanese stocks. The yen's rally has clouded the profit outlook for export-reliant firms, leading foreign investors to sell Japanese stocks. Stock exchange data showed they sold a robust 1.07 trillion yen ($7.33 billion) worth of Japanese shares during the week, following net disposals worth 1.58 trillion yen in the previous week. This trend has continued throughout the year, with foreign investors pulling a net 1.14 trillion yen from Japanese shares this year, a stark contrast to last year's net purchases of 7.91 trillion yen.

The BOJ's monetary policy actions have also influenced the Nikkei share average index, which dropped 4.67% last week, driven by a yen surge amid uncertainties over the BOJ's tightening path and concerns about a U.S. slowdown. However, the index has since rebounded, with investors looking for opportunities to buy Japanese equities at lower prices. Naoki Kamiyama, chief strategist at Nikko Asset Management, believes that domestic demand remains strong, supported by the continuing rise in wages, which could be the catalyst for a recovery by Japanese equities.

The BOJ's interest rate target has also impacted the yield differential between Japanese and foreign bonds, affecting cross-border investment flows in Japanese debt. In the debt market, cross-border investors continued to be net sellers of Japanese bonds for the eighth consecutive week, finance ministry data showed. Foreign investors unloaded short-term Japanese bonds worth 953.5 billion yen, for an eighth straight week of net sales. Japanese long-term debt saw foreign outflows of 1.16 trillion yen, reversing inflows of 1.21 trillion the previous week.

Despite the BOJ's rate hike policy, domestic demand factors, such as wage growth, continue to influence Japanese equities' performance and foreign investor sentiment. The continuing rise in wages supports domestic demand, which could drive a recovery in Japanese equities. As the BOJ's rate hike bets fade and the yen's exchange rate stabilizes, investors may increasingly focus on the fundamentals of the Japanese economy and the potential for a recovery in Japanese equities.

In conclusion, the BOJ's rate hike policy has had a significant impact on the yen's exchange rate and foreign investors' decisions to buy or sell Japanese stocks. However, as the BOJ's rate hike bets fade and the yen's exchange rate stabilizes, investors may increasingly focus on the fundamentals of the Japanese economy and the potential for a recovery in Japanese equities. Domestic demand factors, such as wage growth, continue to influence Japanese equities' performance and foreign investor sentiment, providing a catalyst for a potential recovery in the Japanese stock market.