Trump Policies To Kick BoJ Trade Back Into Gear: Is Japan The New Inflation Play?

Ahead of next week's Bank of Japan (BoJ) meeting, investor sentiment is shifting back toward the ‘BoJ trade’ ? a strategy that plays on long Japanese equities and banks, while shorting the yen and Japanese government bonds (JGBs).

Despite recent reports suggesting the BoJ is unlikely to hike rates before 2024, this revived trade has gained momentum, particularly after Donald Trump's election win, according to JPMorgan analyst Nikolaos Panigirtzoglou.

The yen has weakened, moving from 150 to 153 against the dollar, and the probability of a December rate hike has dropped sharply from 50% to just over 10%.

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Trump's Influence

Panigirtzoglou highlights that investors have been increasing their long positions in Japanese equities, shorting the yen, and shorting JGB futures, expecting that Japan's inflationary pressure from a weaker yen will lead to a boost in economic activity.

The "BoJ trade" emerged at the end of 2022, with the expectation that Japan's persistent negative real rates and a weaker yen would spark inflation and allow the BoJ to lift nominal policy rates.

The inflationary aspect of Trump's policies, which reduce the chance of aggressive Fed rate cuts, has reignited investor interest in the trade.

The BoJ's Indecision: A Mixed Market Reaction

Since September, Japanese equities have traded in a range, although Japanese banks have outperformed, benefiting from the weaker yen.

Positioning in the futures space, particularly for Nikkei and JGBs, has been volatile. While the unwinding of the "BoJ trade" had been significant earlier this year, post-election positioning has surged. However, this build-up in JGB futures didn't last long, as investor sentiment quickly adjusted, reflecting uncertainty over the BoJ's next move.

As Panigirtzoglou notes, the positioning shift was particularly notable, with one-third of the short positions in yen futures and significant unwinding of short positions in JGB futures by the end of September.

Is Japan Still The Inflation Play?

With Japan’s inflationary prospects, driven by negative real rates and a weaker yen, the "BoJ trade" remains a potential winner for investors willing to bet on Japan's evolving economic landscape.

But with market fluctuations and global risks, the outlook remains mixed. As Panigirtzoglou states, the trajectory of the trade hinges largely on the BoJ's decisions in the coming months?investors are closely watching to see if the central bank will wait or take action.

The iShares MSCI Japan ETF , the JPMorgan BetaBuilders Japan ETF (BBJP) and the WisdomTree Japan Hedged Equity Fund (DXJ) are popular ways to get exposure to Japanese equity.

The Invesco Currencyshares Japanese Yen Trust (FXY) provides exposure to the Japanese yen.

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