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4 Jun 2013
Flash: Bond and equity markets took very different views of Japan’s economy - Nomura
FXstreet.com (Barcelona) - Richard Koo chief economist at the Nomura Research Institute notes that bond and equity markets took very different views of Japan’s economy.
He begins by noting that the yen weakness and stock market appreciation brought about by overseas money began to buoy sentiment within Japan, paving the way for further gains in equities. Further, he sees that they also prompted retail investors to enter the market, providing more fuel for the virtuous cycle, and Japanese equities were up 80% from their lows at one point. However, he adds that this virtuous cycle was based on the key assumption that interest rates—and long-term interest rates in particular—would not rise.
Further, he notes that this condition was satisfied as long as domestic institutional investors remained in the JGB market, but consequently the views of the Japanese economy held by equity and bond market participants diverged substantially. He writes, “Moreover, even though the moves in the equity and forex markets were led by overseas investors with little knowledge of Japan, the resulting improvement in sentiment and the extensive media coverage of inflation prospects forced domestic institutional investors to begin selling their bonds as a hedge.”
He begins by noting that the yen weakness and stock market appreciation brought about by overseas money began to buoy sentiment within Japan, paving the way for further gains in equities. Further, he sees that they also prompted retail investors to enter the market, providing more fuel for the virtuous cycle, and Japanese equities were up 80% from their lows at one point. However, he adds that this virtuous cycle was based on the key assumption that interest rates—and long-term interest rates in particular—would not rise.
Further, he notes that this condition was satisfied as long as domestic institutional investors remained in the JGB market, but consequently the views of the Japanese economy held by equity and bond market participants diverged substantially. He writes, “Moreover, even though the moves in the equity and forex markets were led by overseas investors with little knowledge of Japan, the resulting improvement in sentiment and the extensive media coverage of inflation prospects forced domestic institutional investors to begin selling their bonds as a hedge.”