BlackRock Sees Japan Stocks Up, $4B Inflows, BOJ Moves Awaited

BlackRock expects Japanese stocks to outperform 7.5% earnings growth, with $4 billion in U.S. ETF inflows so far.

By Bill Bullington

7/10, 09:55 EDT
iShares MSCI Japan Index Fund
iShares Currency Hedged MSCI Japan ETF

Key Takeaway

  • BlackRock remains bullish on Japanese stocks, expecting earnings growth to exceed the 7.5% consensus, with $4 billion inflows into U.S.-based Japanese ETFs.
  • The firm recommends non-currency-hedged investments despite yen volatility, noting potential stabilization due to upcoming elections and rising interest rates.
  • BOJ's bond-buying reduction plans are crucial, with institutional investors divided on the pace; details expected by July 31.

Japanese Stocks Rally

The rally for Japanese stocks is expected to continue in the second half of the year, according to the BlackRock Investment Institute. In its midyear outlook, the firm emphasized that being overweight on Japanese stocks is one of its highest conviction calls. Wei Li, the global chief investment strategist at the institute, stated at a media event on Tuesday, "We do think the micro case for Japanese equities remains very strong." The firm believes that Japanese stocks can grow earnings faster than the 7.5% consensus expectation in the year ahead.

American investors have been increasingly investing in funds that track Japanese stocks, contributing to a broader influx of foreign investor money. According to FactSet, broad-based Japanese exchange-traded funds (ETFs) in the U.S. have attracted about $4 billion from investors so far this year. However, BlackRock's recommendation is more geared toward Japanese investments that are not currency-hedged. This distinction is significant given the historic slide of the yen against the U.S. dollar, which has caused major divergence among Japan-focused ETFs. For instance, the iShares MSCI Japan ETF (EWJ) is up about 10% year to date, while the Currency Hedged MSCI Japan ETF (HEWJ) is up 28.7%.

Currency Impact and Outlook

The currency impact has been a notable challenge for many investors. Wei Li mentioned that the currency impact has been "really inconvenient" but suggested that there are reasons to believe the yen will stabilize in the upcoming year, especially with national elections looming in 2025. "As we head into an election season ... weaker currency is less helpful, and maybe we could expect some sort of intervention — if not outright direct intervention, that is kind of encouragement around repatriation, encouragement around foreign inflows, that could support the stabilization of the currency," Li said. She also pointed out that rising interest rates in Japan could lead to more support for the yen.

BlackRock is not alone in its bullish outlook on Japan. Goldman Sachs Asset Management also expressed optimism in its midyear outlook, stating, "In Japan, we expect strong equity market performance to continue being driven by structural changes."

BOJ Bond-Buying Cuts

Institutional investors are divided on how quickly the Bank of Japan (BOJ) should pare back its bond-buying program. According to people who attended a recent meeting, life insurance firms, casualty insurers, and asset managers offered a wide range of opinions. Some called for gradual reductions, while others urged for all buying to stop. The central bank did not show a specific plan for reducing its bond purchases, highlighting the difficulty the BOJ faces in formulating a plan that will satisfy market participants.

The BOJ's holdings of Japanese government bonds (JGBs) are larger than the size of Japan's economy, making the central bank's next move crucial. The BOJ will unveil its plans to reduce its bond-buying over the next one to two years on July 31. The variance in views among institutional investors increases the risk of some investors being caught out by the central bank's final decision. Tomo Kinoshita, global market strategist at Invesco, noted, "From among those market views, for example, an entity that doesn’t hold many bonds wants the yield to go up and will want a sharp reduction, so the BOJ needs to carefully look at each position."

Street Views

  • Wei Li, BlackRock Investment Institute (Bullish on Japanese stocks):

    "We do think the micro case for Japanese equities remains very strong."

  • Goldman Sachs Asset Management (Bullish on Japan):

    "In Japan, we expect strong equity market performance to continue being driven by structural changes."