Although the Bank of Japan this week has took a historic step by implementing its first interest rate hike in 17 years, strategists at UBS expect Japanese stocks to continue to push past their recent all-time highs.
The BoJ moved to end an eight-year stretch of negative interest rates, also abandoning other aspects of a long period of ultra-easy monetary policy, including yield-curve control aimed at keeping the 10-year government bond yield near zero.
"But while the Bank of Japan’s decision marks the end of a monetary era, we do not think it will end the bull market in Japanese stocks, which have been a strong performer both this year and last," said Mark Haefele, chief investment officer at UBS.
He expects the Japanese yen to strengthen in the remainder of 2024, but even though stocks in the Nikkei and outside the benchmark have benefited from a weak currency, "we don’t expect an excessive appreciation to dent stocks", he said.
This view was underlined by the early market reaction, with the yen falling versus the US dollar on the news, and the 10- year bond yield sliding lower.
"We do expect the yen to appreciate as the Federal Reserve cuts rates this year," Haefele said, pushing the yen toward $140.
"That should be quite manageable for Japanese equities."
There is a risk that the BoJ could tighten policy further if inflation continues to rise, but the UBS 'base case' is that the central bank will keep policy accommodative, limiting upward pressure on the yen.