Japan's Stocks Still Under Shadow of BOJ Unwinding Bond Holdings

Mint

4 hours ago

The Bank of Japan is fine-tuning its pullback from the bond market but this mustn't obscure the fact that quantitative tightening is well underway and likely to cause instability in some stocks.
The potential impact of quantitative tightening may cast a shadow on the Nikkei 225 Stock Average's chances of climbing further after hitting four-month highs this week. The blue-chip index is skewed toward growth stocks such as Fast Retailing Co., which owns the Uniqlo casual clothing chain, and chip-related firms Advantest Corp. and Tokyo Electron Ltd.
On top of growth stocks, which are known to be susceptible to higher bond yields, large-cap shares are vulnerable. The negative correlation of these shares with bond yields is increasing, said Akemi Hatano, chief quantitative analyst at SBI Securities Co.
This highlights the need for vigilance among investors even after the BOJ this week announced a plan to reduce the pace of tapering in its bond purchases. That move was seen as stabilizing the market after recent sharp moves higher in Japanese government bond yields that rippled across global debt markets.
'Rising bond volatility will have a big impact on how investors select stocks,' said Hatano. Large and blue-chip shares are vulnerable when it spikes because 'they are the most convenient to reduce risks when investors want to cut their risk exposure in a short period of time,' she said.
The BOJ started unwinding its massive bond buying last August but the pace has been slow. Its holdings fell ¥16.7 trillion over the past year. That's a drop of less than 3%, which compares with a decline of about 10% in Treasuries on the Federal Reserve's balance sheet in its first year of quantitative tightening.
The real impact of the BOJ's will still be felt longer-term, said Masao Muraki, a senior analyst at SMBC Nikko Securities Inc. 'We now expect QT to enter a phase of reducing excess liquidity in the banking sector, and this will trigger fiercer competition for deposits, and market instability,' he said.
To be sure, fears that balance sheet reductions will hugely unsettle Japan's markets may be overblown. One could argue that US stocks have remained resilient overall, despite the Fed's unwinding of its holdings that began in 2022.
Even so, the big selloff in Japanese bonds last month was a wake-up call for equity investors on the risk of rising yields.
'Asset classes that have benefited from quantitative easing such as stocks could be affected by quantitative tightening,' said Muraki.
This article was generated from an automated news agency feed without modifications to text.