National Government Debt

TOKYO (Reuters) – The Japanese stock market has become more cautious about rising interest rates. Although speculation about additional policy revisions by the Bank of Japan has receded temporarily, the level of yen interest rates remains high. While bank stocks, which benefit from rising interest rates, have risen conspicuously, looking at stock prices as a whole, stock prices tend to be relatively overvalued compared to government bonds, etc., and downward pressure on stock prices tends to increase due to the strong yen. It is estimated that if long-term interest rates rise to 1%, the Nikkei Stock Average will drop more than 1,800 yen.

Shingo Ide, Chief Equity Strategist at NLI Research Institute, said that if Japan’s long-term interest rate rises from 0.4% to 1% on the 20th, the Nikkei average will be 1,836 yen and TOPIX will be 134 if other conditions remain unchanged. It is estimated that downward pressure will be applied to each point.

When the Bank of Japan expanded the permissible fluctuation range of long-term interest rates from 0.25% to 0.5% on December 20, 2018, the Nikkei Stock Average fell 1,520 yen in about two weeks, and the TOPIX fell 67 points. Meanwhile, the US Dow has risen by 512 dollars, and there is a possibility that the impact of the rise in interest rates, including the appreciation of the yen, was large.

In Japan, the low interest rate environment continued over the past decade due to the large-scale monetary easing by the Bank of Japan, so awareness of the relationship between interest rates and stock prices was low. However, as BOJ Governor Haruhiko Kuroda’s term of office is approaching in April, there are speculations that the monetary policy framework will change, such as yield curve control (YCC).

“In the future, the Japanese stock market may become aware of the yield spread,” said a fund manager at a domestic asset management company. The yield spread is the difference between the yields of bonds and stocks. Generally speaking, if it narrows, stocks will become more expensive, making it easier to shift funds from high-risk stocks to bonds.

Stock prices are not determined solely by their relationship with interest rates. If interest rates rise against the backdrop of an economic recovery, stock prices may rise as they factor in improvements in corporate earnings.

In 2006, when Toshihiko Fukui was governor of the Bank of Japan, it moved to end quantitative easing and to end zero interest rates. Interest rates rose from the beginning of the year as the market priced in monetary tightening, but stock prices rose in tandem with the economic recovery trend.

After the collapse of Lehman Brothers, a different dimension of monetary easing began under Bank of Japan Governor Kuroda, and yen interest rates followed a long-term declining trend. “If the dent in the yield curve is only smoothed out, the economy and stocks will not be significantly adversely affected,” said Yoshinori Shigemi, macro strategist at the Fidelity Institute.

The PER of the Nikkei average and TOPIX as of the 20th is about 12 times, both at the lower end of the range of the past 10 years, and the sense of cheapness is conscious. “Even if the BOJ makes some moves, there will be a short-term decline in stock prices, but there will be no major collapse,” said Jun Ishigane, chief strategist at Mitsubishi UFJ Kokusai Asset Management.

On the other hand, in the United States, interest rates and stock prices are highly correlated in a situation where interest rate hikes are feared. Last year, the S&P 500 and 10-year U.S. Treasury yield spread narrowed to minus 2.3% in early spring. The stock price has deepened its adjustment in conjunction with the interest rate hike by the US Federal Reserve Board (FRB).

The Fed’s interest rate hikes narrowed to 0.5% in December from 0.75% last year, four times in a row. The next rate cut is likely to fall further to 0.25%, and some forecast a rate cut in the second half of the year. At the same time, however, there is concern about an economic recession in the second half of the year, and it is unclear whether the suspension of monetary tightening will lead to higher stock prices.

The strong yen is a cautionary factor for Japanese stocks through the US market. Even if the rise in yen interest rates is small, if the rise in US interest rates slows down or declines, it will double as a factor for yen appreciation (dollar depreciation).

From March to October last year, when the yen weakened, the S&P 500 fell 12.8%, but the TOPIX fell only 0.8%. On the other hand, since October, when the yen has appreciated, TOPIX has risen by 2.3% while S&P has risen by 5.8%.

Yutaka Miura, a senior technical analyst at Mizuho Securities, said interest rates had a strong impact on stock prices through exchange rates. In a period of strong yen, it is unavoidable that Japanese stocks will be subordinated to US stocks.

(Edited by Noriyuki Hirata: Daiki Iga)