Japan – More Grounds for Less Dovishness | Harris Fraser
Research Insights
16 February, 2023
Japan – More Grounds for Less Dovishness

Japanese markets started off the New Year in line with global markets, investment sentiment has improved on the back of more benign inflationary figures, as well as improving economic fundamentals. Over the month of January, the Nikkei 225 gained 4.72% (5.38% in US$ terms), while the TOPIX was 4.42% higher (5.07% in US$ terms)

The BOJ purchased a record number of bonds in January, reflecting market’s expectations for a gradual shift in the monetary policy. Market expectations for a hawkish shift is supported by the change in data. In the latest reading, inflation and wages in Japan have surpassed BOJ original targets, with the CPI coming in at 4% and cash earnings hitting a 4.8% growth in December. With reflation underway, the BOJ has more grounds to follow the path of monetary policy normalisation, which could take place after Haruhiko Kuroda steps down in April. 

The transition away from the current dovish policy could bring more pain to investment markets, as financing conditions tighten and valuations fall. We also note that economic fundamentals in the country remain mixed, household spending continued to fall on YoY and MoM basis, and PMIs missed expectations, with manufacturing PMIs remaining in contraction since November. While the Japanese economy is still expected to be supported by the re-opening across Asian and the economic recovery in China, headwinds remain that would likely pressure investment markets, we would not suggest overweighting Japanese equities considering the recent rally.

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