Nikko Asset Management’s Chief Global Strategist, John Vail comments on the latest US CPI figures and their effect on Japan:
“Japan is being hit by the cross-current winds of Ukraine fears and the strong US CPI figures just released, as both the yen and Japanese Government Bonds (JGBs) are directly impacted. The yen is weakened by higher US inflation and US bond yields, but the Ukraine fears seem to have inspired forex traders on Friday to think that Japanese institutions may repatriate yen in a risk-off scenario. This latter fear factor is very likely misplaced as the safe-haven yen theme has long been marginalized among Japan investors.
“JGBs are hurt by rising US bond yields, but Japan’s inflation outlook is very tolerable, with wages, labor supply troubles and supply chain disruptions all quite under control, although there certainly are some pockets of labor shortages. Neither are there protests about masks or vaccines, since neither are generally mandated but basically voluntary.
“Even with a high Q4 GDP number to be announced on Tuesday, the economy is not overheated nor strained for resources, with Q1 GDP likely to be quite low due to virus fears among consumers. Although food inflation is rising, there is no inflationary panic and the shelves are not being cleared out. The BOJ understands these factors and remains committed to low bond yields via YCC, so the recent pain amongst 10-year bond holders will not likely get much worse, although it must be said that if geopolitics cause much higher oil prices, volatility and uncertainty will likely be high in all asset classes globally.
“With the yen likely remaining in the 115-120 range, Japan’s competitiveness should remain reasonably good, and the global economic outlook for 2022 remains quite good, so Japanese corporate profits should continue to be strong. Thus, with its very low PE valuation, the prospects for the equity market look promising unless the geopolitical situation becomes horrible or global bond yields accelerate sharply further.”