One of our favourite strategists, Hajime Kitano, is back in business.
Kitano has been silent for several months following his resignation from JPMorgan as Chief Japan Equity Strategist in late January.
At the time, the Japanese revival was quickly becoming the biggest economic story in the world, and his absence from the conversation struck us as unfortunate.
Kitano landed at Morgan Stanley this month, though, and we’re thrilled to see that he’s back to cranking out fresh analysis of Japanese markets.
The big question about Japan this week is what to make of the spike in Japanese government bond yields in recent trading sessions.
In a note to Morgan Stanley clients today – titled “Quick Comment: What to Make of the Sharp Rise in Interest Rates?” – Kitano points out that the recent spike in yields puts Japanese markets in “unfamiliar territory,” the likes of which haven’t been seen in nearly 20 years.
Typical of Kitano’s style, the note begins with a critique of Japanese press coverage of financial markets: “The May 16 Nikkei carries a report at the top of its front page entitled ‘Broadening of investors in Japanese stocks.’ The subtitle is ‘Funds shift from bonds.'”
Great Rotation, anyone? (One of the goals of Japan’s monetary stimulus is to lower government bond yields to levels where they are no longer attractive to investors, such that they will sell their bonds and move into riskier assets like stocks.)
What’s new, though, is the behaviour of the relationship between Japanese stocks and bond yields: the typically positive correlation has now gone negative for the first time since 1995.
In other words, stocks and bonds are now rising in tandem, and investors looking for a Japan-style “Great Rotation” ought to take that into account.
We cannot remember a time when interest rates have been considered a principal determining factor for the stock market.
We think that Exhibit 3 makes this plain. In the case of Japan, the correlation coefficient between interest rates and the stock market (measured over three-year periods) had remained consistently positive.
However, we think it is important to note that the correlation coefficient between these two series has now become negative in Japan’s case for the first time since 1995, following on from the same pattern occurring in the US from around 2011. We recommend investors to bear in mind that the financial markets are in unfamiliar territory.
The chart below shows the change in correlations.
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