As the Japanese equity market continues its relentless climb, investors are left wondering if there is anything that can stop its upward momentum. With not much on the Asian economic and policy calendar to sway the market, attention turns to the upcoming Japanese producer price figures, which could potentially give a pause to the bullish sentiment or serve as a green light for further gains.
According to a Reuters poll of economists, there is a consensus view that the year-on-year disinflation in Japan’s goods-producing sector seen over the past year will flip into outright deflation in December. It is expected that the annual rate of goods inflation will fall to -0.3% in December from 0.3% in November, marking the first time it has fallen below zero since February 2021. This impending shift in producer price pressures will likely have an impact on consumer inflation, potentially easing it further away from the Bank of Japan’s 2% target. Consequently, there may be a relief of pressure on the central bank to “normalize” policy.
Speculation on BOJ Policy
The Japanese bond market is already reflecting investor sentiment regarding the future path of Bank of Japan (BOJ) policy. The two-year yield fell below zero for the first time since July, indicating that there is a growing belief that the central bank may shift its stance and not tighten policy as previously anticipated. This sentiment is in line with the reconsideration of the BOJ’s policy path, as investors reassess the impact of easing producer price pressures on other aspects of the economy.
While the Japanese equity market enjoys its sixth consecutive rise on Monday, gaining around 10% in just six sessions, there are concerns that the market may be ripe for a correction. Otavio Costa, from Crescat Capital, draws attention to the fact that the Japanese stock market cap is roughly 150% of GDP, making it one of the most overvalued markets in the world. This observation raises questions about the sustainability of such valuations and the potential for a market correction in the future.
Amidst the focus on Japan, the Chinese economy is facing its own challenges. The recent decision by the People’s Bank of China (PBOC) to keep its medium-term policy rate steady has surprised the market, disappointing expectations of a rate cut to support the country’s post-pandemic recovery. The PBOC’s rate decision poses a dilemma as the economy requires stimulus, but cutting rates may exacerbate the weakness of the yuan and the possibility of domestic capital flight and foreign investment deterrent.
The weakening of the onshore yuan observed after the PBOC’s announcement serves as a reminder of the delicate task faced by the central bank. The current economic landscape requires careful maneuvering to navigate the potential risks and uncertainties. Balancing the need for stimulus with the stability of the currency and the preservation of investor confidence is a challenging task for the PBOC.
As the Japanese equity juggernaut continues to surge, driven by factors such as anticipated deflation and a potential shift in BOJ policy, investors are left contemplating the sustainability of this upward trajectory. Meanwhile, the Chinese economy faces its own challenges, requiring careful decision-making by the central bank to stimulate growth while maintaining currency stability. The coming days will provide further insight into these dynamics as investors closely monitor market developments.
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