The BoJ should be forced to change its stance

Market Development: In early May, the Japanese market followed the decline in the US market as the Fed increased the key rate by 50 basis points. Concerns over the Shanghai lockdown and Ukraine conflict also weighed on market sentiment.

Fund Commentary
17 Jun 2022

Market Development: In early May, the Japanese market followed the decline in the US market as the Fed increased the key rate by 50 basis points. Concerns over the Shanghai lockdown and Ukraine conflict also weighed on market sentiment.

In mid-May however, even though the Dow fell for eight straight weeks through to 20th May, the market rebounded as Japanese equities began to look more undervalued.

In late May, the Japanese market advanced as concerns over inflation and lockdown in China retreated. In addition, the draft of the Kishida administration’s plan to bring growth was appreciated.

In May, the TOPIX closed the month at 1,912.7 (up 0.7% MoM) and the Nikkei 225 at 27,279.8 (up 1.6% MoM). 18 out of 33 sectors gained.

The top five performers were Marine Transportation, Mining, Oil, Warehousing and Precision Instruments. The bottom five performers were Pulp & Paper, Fishery, Services, Banks and Transportation Equipment.

The 10 Yr JGB yield began at 0.23 and was overall stable, ending the month at 0.24, even though the US 10 Yr Treasury hit 3.2 at one point. The JPY against the US Dollar opened at 129.7 and remained above 130 in early May, while concerns over the US rate hike and inflation lingered.

The rate, however, declined into the 120s as the expectation that US inflation was peaking spread. It ended the month at 128.7. The crude oil price began at 104.69 and rapidly rose from mid-month, closing at 114.67.


Global markets remain volatile with the inflation outlook and monetary policy in the US playing a central role in market direction. The CPI in May for the US surged to 8.6% YoY, its highest level since December 1981.

The FRB is expected to implement multiple half-point rate increases this year, while QT (Quantitative Tightening) started in June. In this environment, the Consumer Confidence Index for June declined 8.2 points to 50.2, a historical low since statistics began in 1952.

In Japan, the April core CPI rose 2.1% YoY, recording over 2% for the first time since September 2008 – excluding periods affected by the consumption tax hike. The economic outlook in Japan is improving.

Industrial production in April declined 1.3% MoM, the first decline since January 2022. That said, the government estimates that industrial production in May will rise 4.8% MoM, followed by a further rise of 8.9% MoM in June.

In the Economy Watchers Survey of Business, the overall current conditions DI for May rose 3.6 points, MoM, to 54.0, marking three months of consecutive recovery. The outlook DI in May recorded a fourth consecutive MoM increase to 52.5. The corporate profits outlook seems solid.

According to Nomura, recurring profits in FY2021 ending March 2022 for Russell / Nomura large cap companies increased 34.1% YoY. They expect recurring profits for FY2022 to rise a further 11.1% YoY.

Recurring profits in FY2021 were 15.7% above the previous peak set in FY2018, and the recurring profit margin in FY2021 rose to 9.0%, higher than the previous peak of 8.3% in FY2017. They are predicted to rise further to 9.4% in FY2022.

The reasons for higher margins are:

1. Cost-cutting steps taken by companies in response to declining demand during the pandemic.

2. Supply chain constraints allowed companies to successfully pass material cost hikes on to their selling prices.

In these circumstances, the BoJ still maintains its monetary policy, including Yield Curve Control (YCC). This is likely one of the reasons why the Yen sold off with the USD / JPY touching 135, the lowest level since October 1998.

The CPI may go higher as thousands of items from beer to railroad fares are set to rise towards the end of this year. We believe the BoJ will be forced to change its stance to stop further weakness of the yen against major currencies.

The Yen’s stability should be a trigger for the Japanese market to rise as investment from foreigners should be encouraged on the back of the market being quite cheap with the PER standing at 13x.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 31st May 2022 went up 1.9% compared with that of 28th April, whilst the TOPIX TR Index rose 0.8% during the same period. The Fund did not add any new names to the portfolio and no stocks were sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a very cautious stance towards IT-related sectors.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
+44 1481 742380


The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 14/06/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.