JP Morgan AM: A stronger yen could depress Japanese stocks

November 6, 2023

Last week, the Bank of Japan (BoJ) kept its policy rate unchanged at -0.1% but loosened yield curve control (YCC). YCC targets longer-term interest rates, and last week the BoJ moved its upper reference level for 10-year Japanese government bond yields from 0.5% to 1%.

This change was precipitated by ongoing price and wage pressures. Core inflation (excluding fresh food and energy) was 4.2% year-on-year in September, well above the BoJ's 2% target. As Japanese yields move higher, the yen is likely to strengthen.

This could hamper export-oriented Japanese firms who earn a large proportion of their earnings overseas, and must convert these foreign currency earnings back to yen. Thus, while governance reforms and a better macro outlook are positive for Japanese equities, an orderly exit from YCC is likely necessary to avoid pressure on the Japanese stock market.