20180228-法国巴黎银行-Japan__Asset_outlook_amid_A_Risng_Jpy_27页_2mb

BNP Paribas Markets Call Summary

Core Content

BNP Paribas provides a weekly cross-asset market view, focusing on Japan's economic and financial outlook amid a rising Japanese Yen (JPY) and the implications for equities, bonds, and foreign exchange (FX) markets.

Key Points

• Global Risk Appetite: Global risk appetite is gradually recovering, with most risky markets returning to the middle of their 2018 trading range. Volatility is expected to remain higher than at the start of the year.
• Fed Policy and USD/JPY: The market interpreted the first Fed Chair Powell testimony as slightly hawkish, leading to higher Treasury yields. However, the USD is expected to weaken, and the S&P500 should remain supported.
• Political Events in Europe: Italy's general elections and Germany's SDP members' vote on coalition formation are key upcoming events that could affect market sentiment.
• Japan's Economic Outlook: Japan's economy is near full capacity, but structural rigidities and a growing labor supply are limiting wage growth and inflation. This is expected to keep the Bank of Japan (BoJ) policy unchanged in 2018.
• JPY Appreciation: The JPY is likely to strengthen against a structurally weaker USD and due to Japanese investors hedging foreign assets. The BoJ has limited scope to loosen policy in response to a stronger JPY.
• BoJ Policy: The BoJ is unlikely to adjust its policy in 2018 due to low inflation. The BoJ's yield control and bond purchases are expected to keep 10y JGB yields below the cap. We expect 10y yields to decline, with 5s10s targeting 13bp being attractive.
• Equity Impact: A stronger JPY is a headwind for Japanese equities, but valuations remain relatively attractive. The strategy favors long stocks benefiting from labor reform versus short stocks impacted by wage pressures.
• FX Strategy: The trade of the week involves short USDJPY via long-dated options due to the adverse carry and the likely slower pace of JPY appreciation compared to the EUR. A 2y 101 USDJPY put is recommended, funded by a 1y 99 put.
• Alternative Strategy: Short CHFJPY via options is also considered attractive, with lower carry and high volatility levels.

Key Contributors

• Ryutaro Kono, Head of Global Markets Research, Japan, BNP Paribas Securities (Japan) Limited
• Jason Lui, Head of Asia Equity and Derivative Strategist, BNP Paribas (Hong Kong Branch)
• Chris Yung, Equity and Derivative Strategist, BNP Paribas (Hong Kong Branch)
• Reiko Tokukatsu, Relative Value Strategist, BNP Paribas Securities (Japan) Limited
• Vasilis Koutsaftis, Senior Global FX volatility Strategist, BNP Paribas Sec Corp
• Camille de Courcel, Europe interest Rate Strategist, BNP Paribas (London Branch)

Market Prognosis

Economic Insights

• Labour Market: Japan's unemployment rate is at a 20-year low, with more job vacancies than applicants. However, real wage growth has been limited, keeping core inflation at 0.4% y/y.
• Inflation and BoJ Policy: The BoJ is unlikely to tighten policy until inflation reaches above 1%. The BoJ's yield control and bond purchases are expected to keep 10y JGB yields low.
• Foreign Investment: Japanese equities have been supported by foreign inflows, especially from US investors, as well as the global recovery in earnings.
• Sector Opportunities: Companies in human resources management, "consumption of experiences", and logistics are expected to benefit from labor reforms.

Strategy Recommendations

• Trade of the Week: Short USDJPY via long-dated options to capitalize on the JPY's strengthening.
• Alternative Trade: Short CHFJPY via options due to lower carry and high volatility.
• Equity Strategy: Favor long stocks that benefit from labor reform and short stocks impacted by wage pressures.

Summary

BNP Paribas outlines a comprehensive market outlook for Japan, highlighting the BoJ's continued monetary policy support, the strengthening JPY, and its implications for equities and FX. The analysis suggests that while JPY appreciation may affect equities, the current valuations and structural factors support a cautious investment approach. FX strategies are recommended to capitalize on the JPY's trajectory, with a focus on options trading.