The yield on newly issued 10-year Japanese government bonds has risen into the 3% range amid expectations for a Bank of Japan rate hike and growing views that inflation is becoming entrenched. Ikeda Yunosuke (池田雄之輔) of Nomura Securities analyzes the outlook for Japanese equities.
In September, the yield on newly issued 10-year Japanese government bonds, the benchmark for long-term interest rates, rose to nearly 3%. The prevailing view has shifted away from the risk of deteriorating fiscal conditions toward the idea that inflation has become sufficiently entrenched for the Bank of Japan to continue raising rates, with the impact on stock prices depending on how the market interprets the development.
Market pricing indicates that the Bank of Japan’s policy rate is expected to rise from the current 0.0-something percent to nearly 2.5%, meaning that the rise in long-term interest rates can be explained by growing expectations for rate hikes. The fundamental issue is seen as inflation and an acceleration in rate hikes, rather than fiscal concerns.
Whether the upward trend in stock prices remains intact even if long-term interest rates exceed 3% will depend on their relationship with nominal GDP growth. With nominal GDP growth expected to settle at around 3% on average, a sustained rise in long-term interest rates above 3% could make it more difficult for equity valuations to rise. However, the central scenario is that stock prices will continue to rise if corporate earnings remain solid.
US CPI and the FOMC are attracting attention as turning points for the market. Based on views following the Jackson Hole meeting, a scenario of higher stock and bond prices is expected if inflation is brought under control, while inflation remaining elevated could lead to further rate hikes depending on the FOMC. The worst-case scenario would be for the FOMC to forgo a rate hike in September, although the prevailing view at present is that inflation control could serve as the underlying assumption.
Against this backdrop, the outlook for Japanese equities is expected to fluctuate depending on future turning points and the direction of inflation in the market. Ikeda Yunosuke (池田雄之輔) believes that a decline in inflation could bring higher stock and bond prices, while continued elevated inflation could place adjustment pressure on specific sectors, including AI-related stocks.