A Kuroda Surprise Risks Blocking Topix’s Ascent to 32-Year High

(Bloomberg) — A surprise from Bank of Japan Governor Haruhiko Kuroda at the last policy meeting before his term ends may be the only thing that could stop the nation’s benchmark equity index from climbing to a more than three-decade high in the near future.

The BOJ chief shocked markets three months ago when he doubled a cap on bond yields, a move that some saw as signaling possible normalization after years of ultra-loose policy. The Topix lost 3.5% over 10 sessions back then. A similar jolt could scupper the gauge’s strong rally this year, which has left it less than 2.5% away from the highest level since August 1990.

While the majority of economists expect no policy change at the end of the central bank’s two-day gathering Friday, there’s reason to be nervous that Kuroda could make a dramatic exit following his 10-year reign.

READ: Kuroda’s Last Meeting Has Markets on Alert for Surprise: Guide

“I think there will be no policy correction but some investors, including myself, are a little hesitant because of the December surprise,” said Shogo Maekawa, global market strategist at JPMorgan Asset Management Japan Ltd.

Foreign investors, who typically account for more than 70% of daily trading in Japanese stocks, have shown some signs of trepidation, selling about $2.4 billion worth of shares in the two weeks through March 3. However, they bought $7.5 billion worth of futures over the same period.

The Topix has jumped more than 9% this year, more than five points better than gauges of US and global peers. While many markets are fraught with concern over rising US interest rates, Japanese stocks have been supported by an accommodative BOJ policy, relatively cheap valuations and benefits that a weaker yen has brought for exporters.

Some pundits like Goldman Sachs Group Inc. strategists including Andrea Ferrario are concerned Kuroda could adjust the yield-curve control policy to “lessen the burden” on his designated successor Kazuo Ueda. Others worry that Ueda will pursue tightening in the months to come.

Either could derail the rally in Japan equity gauges, which have extended gains since recovering from the BOJ’s unexpected move in December. But bullish investors say even another setback could be short-lived.

READ: Fear Gauge Shows Calm as Japan Picks New BOJ Boss: Taking Stock

“The expectation that the BOJ is unlikely to change its current monetary policy is an important factor to support Japanese equities,” said Tomo Kinoshita, a strategist at Invesco Asset Management Japan Ltd. Rising inbound tourism revenue as China reopens, and the softer yen are also reasons for optimism, he said.

Earnings estimates for Topix companies have risen as the yen has resumed weakening after a rally that followed Kuroda’s December surprise. Improving corporate governance and efforts to raise valuations are seen as other catalysts for Japanese stocks.

READ: Japanese Banks Rise as Investors Take Position Ahead of BOJ

–With assistance from Aya Wagatsuma.

©2023 Bloomberg L.P.

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