The latest Bloomberg Markets Live Pulse survey suggests that Japanese capital is likely to remain offshore as the central bank inches closer to tighter monetary policy.
Approximately 40% of the 273 respondents indicated that the Bank of Japan’s (BOJ) first interest-rate hike since 2007 may not prompt Japanese investors to sell foreign assets and bring the funds back home, which could have positive implications for U.S. stocks and bonds.
The survey underscores that a modest increase in the BOJ’s policy rate might maintain yield differentials between Japan and other major economies at levels too significant for Japanese investors to traverse.
This scenario could alleviate concerns that a significant policy shift by the BOJ could reverberate globally, given Japan’s substantial $4.43 trillion holdings of foreign securities.
Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management, remarked, “We’re seeing large retail outflows into foreign bonds and equities, and I don’t think the end of the BOJ’s sub-zero rate policy will change this trend.”
Over the past decade, Japanese funds have flowed into destinations like the United States and the Cayman Islands in pursuit of higher returns.
Despite mounting speculation surrounding a potential change in BOJ policy, Japanese investors acquired ¥3.5 trillion ($23.5 billion) worth of foreign bonds in the first two months of this year, following a ¥18.9 trillion purchase in 2023, the highest in three years. Additionally, individual investments in overseas equities have seen an uptick in recent months.
BOJ policymakers are set to deliberate on the possibility of ending the world’s last negative interest rate policy at a two-day meeting concluding Tuesday. Overnight-indexed swaps on Friday indicated a 67% probability of such action.
According to the poll participants, by the end of the year, 73% anticipate the BOJ to increase the short-term interest rate to a range between 0.01% and 0.5%, up from the current minus 0.1%.
Despite this potential adjustment, the BOJ’s policy rate is expected to remain approximately 400 basis points lower than its U.S. counterpart by the end of 2024, signaling a challenging outlook for the Japanese currency.
Currency analysts predict that any strengthening of the yen in response to tightening measures with mild signaling could be short-lived. Alan Ruskin, chief international strategist at Deutsche Bank, cautioned that yen appreciation resulting from tightening news could swiftly reverse.
The limited potential for yen appreciation could bode well for Japanese stocks. The Nikkei stock average surged to a record high this year, aided by a weak currency, accommodative monetary policy, and efforts by the Tokyo bourse to enhance corporate governance.
Survey participants indicated that Japanese equities remain structurally cheap, with 45% expressing optimism about their prospects.
The MLIV Pulse survey, conducted among Bloomberg News readers from March 11 to Friday, was administered by Bloomberg’s Markets Live team, which also manages the MLIV blog.
