There have been major developments out of Japan this week. The Bank of Japan surprised the market by widening its yield curve target by a quarter point, and then the internal affairs ministry reported that consumer prices excluding fresh food jumped 3.7% in the year ending November.
That rate of inflation would be welcomed in the U.S. and Europe, but for Japan, it marked the fastest core rate since 1981.
Bank of America strategists led by Michael Hartnett say the move means there’s a higher floor for global interest rates. Deflationary Japan had set the floor for global interest rates for the last 30 years, but now that’s changing, and the Bank of Japan may get rid of yield curve control altogether next year. The investment implications? They’re bullish for commodities but not credit, equities outside the U.S., small caps, value stocks, industrials and banks.
In particular, higher Japanese yields will mean a bull market for Japanese banks, the BofA strategists say. And they note that banks and real estate have historically outperformed when Japanese government bond yields rise.
It’s not just Bank of America making that call. Strategists at Citi say going long Japanese banks, in U.S. dollars, has always been its preferred way to position for a Bank of Japan shift. At 0.6 price-to-book value, they are still well below their levels before yield curve control. In particular, they like Mitsubishi UFJ Financial Group 8306,
The core PCE price index rose 0.2% in November, as expected. The same report also showed a 0.4% rise in personal income and a 0.1% increase in consumer spending. Separately, durable-goods orders fell 2.1%.
U.S. stock futures ES00,
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Also due to be released will be durable-goods orders for November, and at 10 a.m., the final University of Michigan consumer sentiment reading, as well as new-home sales.
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