This article examines why the stock market remains firm as long-term rates rise worldwide, focusing on interest-rate trends in Japan and the United States and the relative cheapness of Japanese stocks.
First, long-term yields are rising sharply worldwide, with 10-year government bond yields breaching the milestones of approximately 3% in Japan and 5% in the United States. The upward momentum in interest rates remains strong. Nevertheless, stock markets have remained firm.
In the US market, the Dow and Russell 2000 have shown somewhat heavy trading, while the Nasdaq Composite and S&P 500 have remained near record highs. A sharp rise in interest rates should weigh on the stock market, but that has not happened.
The situation can be explained if inflation expectations are pushing up interest rates. One view is that while inflation raises interest rates, corporate profits may also expand.
In Japanese stocks, the background includes the forward inflation rate implied by inflation-linked government bonds exceeding the Bank of Japan’s 2% target, which is said to be supporting some of the strength in Japanese stocks.
The Nikkei 225’s forward P/E is approximately 18x and its earnings yield approximately 5.6%, a level that does not appear expensive even compared with long-term rates of around 3%.