Kuroda Gets a ‘Pass’ From Japan Stock Investors as Topix Jumps

Has Kuroda Finally Got it Right?
  • Lenders lead gains as BOJ refrains from deeper cuts to rates
  • Benchmark equity gauge posts biggest advance since July

After a long run of disappointing investors, Haruhiko Kuroda got it right, if the Japanese stock market is any guide.

Shares in Tokyo posted their biggest gain since July after the Bank of Japan adjusted its monetary policy. Banks surged as Kuroda’s board refrained from making deeper cuts to negative interest rates. Exporters advanced as the yen weakened. The Topix index outperformed the Nikkei 225 Stock Average as the central bank said it was going to buy more exchange-traded funds tracking the broader gauge.

The Topix rose 2.7 percent at the close in Tokyo, after briefly falling following the decision. The Nikkei 225 added 1.9 percent. The yen lost 0.9 percent against the dollar. All 33 groups in the benchmark index climbed, with a measure of lenders soaring 7 percent for the largest gain.

“The BOJ’s policies are a ‘pass,’” said Hideyuki Ishiguro, a senior strategist at Daiwa Securities Co. in Tokyo. “That they didn’t cut rates more is good for banks and insurers. Their policy of controlling long and short-term interest rates and steepening the yield curve is also positive.”

SecurityPercent ChangePrice
Topix+2.7%1,352.67
Nikkei 225+1.9%16,807.62
Yen-Dollar-1%102.58

The BOJ shifted the focus of its monetary stimulus away from a rigid target for expanding the supply of money, to controlling the shape of yields across different maturities. It also scrapped a goal for the average maturity of its government bond holdings. A steeper yield curve would make lending more profitable for banks, which had plunged 28 percent this year through Tuesday after the BOJ announced a move to minus interest rates in January.

Mitsubishi UFJ Financial Group Inc., the nation’s largest lender, jumped 7.4 percent, while Sumitomo Mitsui Financial Group Inc. rose 7.3 percent. Banks make up about 8 percent of the Topix. Insurers posted the second-largest advance among the gauge’s industry groups, rising 5.5 percent.

“Overall, the BOJ’s stance is positive for bank shares, and this is making it easier for the market to rise,” said Ryuta Otsuka, a strategist at Toyo Securities Co. in Tokyo.

Slim Majority

A narrow majority of economists surveyed by Bloomberg had expected the BOJ to announce expanded stimulus. Most of the rest had forecast action in November, December or next year, while a few predicted no additional easing at all. The BOJ statement comes before the U.S. Federal Reserve will give its decision on whether to raise interest rates, with futures markets seeing a chance of just 22 percent that it will act.

“It’s a very safe move, choosing to reserve some of their bullets for the November or December meetings,” Nicholas Teo, a trading strategist at KGI Fraser Securities in Singapore, said by phone. “It seems the BOJ didn’t go full force in its move to further ease monetary policy.”

Markets haven’t taken so well to recent Kuroda announcements. The Topix plunged to an almost 16-month low in February after the BOJ decided to adopt negative interest rates. For each of the BOJ’s five decisions in 2016, the measure dropped an average 1.1 percent over a five-session period starting from the announcement day.

Earlier in his term, he could do no wrong. In Kuroda’s first policy decision after taking over as governor in April 2013, the central bank doubled monthly bond purchases to unprecedented levels, helping send the Topix to its best annual gain in 14 years and the yen to its largest decline against the dollar since 1979.

‘Quite Underwhelming’

Not everyone was satisfied with the BOJ’s action this time.

“It’s really quite underwhelming given all the pronouncements and rhetoric,” said Sean Darby, Hong-Kong based chief equity strategist at Jefferies Group LLC. “The equity market looks at it with relief with no further negative deposit rate cuts. But generally the market will take it as there having been monetary tightening because the yield curve moved up. Policy-wise, it lacked a lot of bite.”

ETF Tweaks

The central bank also tweaked its ETF buying program, by vowing to shift more purchases to the Topix, which is ranked by market capitalization, while cutting back on buying of funds linked to the price-weighted Nikkei 225. While Fast Retailing Co., the clothing firm that has the largest ranking on the Nikkei 225, climbed 1.5 percent despite the move, the Topix outperformed the Nikkei by 0.8 percentage points.

The Topix had dropped 15 percent through Tuesday, against a 13 percent decline for the Nikkei 225.

“Essentially, we’ll see market-cap weighted buying for ETFs going forward,” said Takuya Takahashi, a Tokyo-based senior strategist at Daiwa Securities Group Inc. “In principle, the Topix has been lagging behind since negative interest rates were introduced, so that may be reassessed.”

Takahashi says he’s also in the optimists’ camp after the decision.

“The BOJ had gone on about having a conversation with the market,” he said. “But in the end we’ve essentially seen a positive surprise.”

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