Central Banks / Central Bank Events

TOKYO (Reuters) – The Nikkei 225 Stock Average has increased by about 2.5 times in the decade since the Bank of Japan implemented large-scale easing under Governor Haruhiko Kuroda. Many believe that the weaker yen, which was the biggest factor in the early stages of easing, has now lost its effect on rising stock prices. The purchase of exchange-traded funds (ETFs) worth 50 trillion yen on a market price basis also supported Japanese stocks, but the next BOJ governor will have a heavy task of cleaning up the aftermath.

Quantitative and qualitative monetary easing, nicknamed “bazooka”. Even before its introduction in April 2013, expectations for easing led to a weaker yen and higher stock prices. The market was abuzz.

The Nikkei Stock Average climbed about 30% from 12,400 yen at the end of March 2013 to 16,300 yen at the end of December 2013. The depreciation of the yen was the driving force. The dollar/yen exchange rate was around 94 yen at the end of March 2013, but fell by about 10 yen to 105 yen in January 2014.

According to SMBC Nikko Securities, the net profits of TOPIX companies whose fiscal year ends in March increased by about 70% in the fiscal year ended March 2014. Although the stock price hike was preceded by market expectations, it was accompanied by the “substance” of improving corporate performance, and the weaker yen tended to directly cause the stock price to rise.

An increase in share buybacks also contributed to the rise in stock prices. “As corporate financial conditions improve, more companies are using their surplus funds to buy back their own shares,” says Masahiro Nakamura, chief researcher at the Daiwa Institute of Research.

However, the relationship between the depreciation of the yen and high stock prices has changed completely. In 2022, the yen depreciated from 115 yen to the dollar in early spring to 151 yen to the dollar in October, but the Nikkei Stock Average in the same year fell by 9%. By industry, the weaker yen is not necessarily a factor in the rise in stock prices, regardless of individual stocks, such as electrical machinery and transportation equipment.

The difference is in business performance. According to SMBC Nikko Securities, the net profit forecast for TOPIX companies in the fiscal year ending March 2023 is expected to increase by 1.2%, remaining almost flat. Looking at the April-December period, by industry, the manufacturing industry saw a 6% decline in profits, showing that corporate earnings have been tough even under the yen’s depreciation.

Overall, not a few economists see the yen’s depreciation as a positive for the Japanese economy. It can also be said that the depreciation of the yen prevented corporate earnings from falling sharply. However, as inflation progresses worldwide, the depreciation of the yen has a strong negative effect, increasing the burden of import costs such as raw materials.

Looking at Toyota Motor’s consolidated operating income, the foreign exchange had a positive effect of 900 billion yen in the fiscal year ended March 2014. In the April-December quarter of 2010, it was a positive 1.045 trillion yen, and the effect of the weaker yen is still significant. However, the soaring cost of materials had a negative effect of 1.1 trillion yen, which was the main reason for the 17% decline in profits.

In the stock market, the depreciation of the yen is not as favorable as it used to be. Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, said, “Amidst the accelerated rise in resource prices since the corona crisis, the weaker yen was perceived as one of the causes of higher costs, and it became difficult to directly affect stock prices.” Point out.

Last year, while monetary tightening progressed in the United States, the yield curve control (YCC) policy kept yen interest rates low. Yen depreciation or yen appreciation? Exchange rates are not the Bank of Japan’s policy objective, but delicate steering is required because they are factors that have a large impact on the economy and prices.

<“Difficulties” Remaining for the New Governor>

Exchange-traded funds (ETFs) are also a point where attention will be paid to the response of the next governor of the Bank of Japan. It was former Governor Masaaki Shirakawa who initiated the purchases by central banks, which is unusual even in the world, but Governor Kuroda greatly expanded the scale.

The amount was initially set at 450 billion yen during the Shirakawa presidency, but was increased to 1 trillion yen with Bazooka 1 in April 2013, and 3 trillion yen with Bazooka 2 in October 2014. In March 2020, it was raised to 12 trillion yen (upper limit).

The Bank of Japan cites lower risk premiums as the purpose of buying ETFs. The idea is that if the risk premium is lowered, money will circulate, leading to an increase in prices. “Looking at the yield spread, we could see the effect of reducing the risk premium only for a short period of time immediately after the increase in the purchase limit,” said Shingo Ide, chief equity strategist at NLI Research Institute.

On the other hand, in the market, dependence trading methods such as TOPIX’s rate of decline in the front market as a criterion for triggering the BOJ’s ETF buying were also conspicuous.

Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities, commented on the BOJ’s buying of ETFs, saying, “For the time being, investors are only buying ETFs and have no plans to sell them. There is.”

The outstanding balance of ETFs acquired by the Bank of Japan so far is about 50 trillion yen. The amount of purchases in 2022 was only 630 billion yen, and it seems that they are starting to take a “distance”, but if they turn to selling, it could have a big impact on the market. A difficult task remained for the next governor of the Bank of Japan.

(Noriyuki Hirata, Hiroko Hamada, Nobuyo Saito Edited by Daiki Iga)

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