• Japanese stock markets advance after BoJ hike decision

• Baby step to normalize monetary policy boosts confidence in economy

• BoJ’s pledge for accommodative stance also aids

 

First hike since 2007

On Tuesday, the Bank of Japan raised interest rates for the first time in 17 years, dragging them out of the negative zone. Besides that, policymakers in Japan announced the end of the yield curve control policy and purchases of risky assets such as domestic ETFs.

However, they remained committed to keep buying bonds and intervene to prevent any rapid surge in yields. This was the main reason why the yen plummeted and the Japanese stock indices extended their 2024 advance as it signaled that this hike is just a small step towards policy normalization and not the start of an aggressive tightening cycle.

Markets seem to have positively evaluated BoJ’s policy actions, which could be interpreted as a confirmation that the much-anticipated structural change in the Japanese economy has slowly started to materialize. Moreover, Japanese companies agreed on a whopping (for the country’s standards) 5.28% wage hike, providing a strong indication that the deflation era could indeed belong in the past.

In a nutshell, Japanese policymakers appear confident that the economy is on the recovery rails but will unwind their accommodative measures very gradually to avoid any turbulence. This seems to be the perfect setup for stocks, which have already rallied to fresh all-time highs in 2024.

Is there more upside in Japanese stocks?

Besides the monetary policy shift, there are a handful of reasons why Japanese stocks could extend their gains in 2024. Firstly, with the latest changes across all fronts, Japan could prove to be the most attractive destination for funds fleeing from the battered Chinese stock market that seek exposure in Asia.

Furthermore, due to the deflationary mentality, there is a pile of cash currently sitting on the sidelines. In January, the government launched a tax-exempt investment savings plan to encourage Japanese households to shift those funds towards other assets. Given Japanese companies’ strong earnings growth lately, domestic stocks could prove to be their first choice.

Finally, according to Bloomberg, 37% of the Nikkei 225’s constituents are trading below their book value compared to a 3% figure for the S&P 500.  This clearly suggests that there is more upside potential for Japanese stocks, if the monetary policy shift and the gradual lifting of support measures deliver the anticipated results in the Japanese economy.

Levels to watch

The JP225 stock index has been in a steady advance since the beginning of 2024, posting consecutive higher highs and an all-time peak of 40,564. Despite a minor pullback, the price has quickly rebounded and is on track to re-test its all-time highs.

Should bullish pressures persist, the index may revisit its recent record high of 40,564 ahead of the 41,000 psychological level.

To the downside, the price may challenge the February support of 38,888 ahead of the March low of 38,310.