Japan – A Step Forward | Harris Fraser
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26 April, 2022
Japan – A Step Forward

While Japanese equities rebounded in March, due to the Bank of Japan’s market intervention, the Japanese Yen entered a freefall in the month, falling 5.52% against the Dollar, which brought the equity returns down in US$ terms. In the month of March, the Nikkei 225 and TOPIX gained 4.88% (lost 0.68% in US$ terms) and 3.15% (lost 2.32% in US$ terms).

Fundamentals remain mixed with several key indicators underperforming. The recent announcement to remove inbound travel restrictions from numerous countries was welcomed by the market. However, there is still no plan to reopen the borders to international tourists, tourist as the key sector of the Japanese economy remains restricted. In the short to medium term, growth in the country will likely stay under pressure due to the economy being far from full power, which could put a limit to the upside in the equity market.


Yet, inflation was surprisingly not a problem in Japan, with its CPI remaining below the Bank of Japan’s long term target. The Bank could keep its monetary policy loose, the surplus liquidity should continue support the market’s valuation levels. However, bond yields in Japan also saw upward pressures in line with global markets. In response to rising bond yields, the Bank of Japan vowed to keep the bond yield under the cap with unlimited bond buying, which put huge pressure on the Japanese Yen. Coupling this with the lukewarm economic fundamentals, we would still avoid overweighting in this market.
 

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