Japanese stocks jumped more than 2 percent on Monday, driven by strong gains for chip and artificial intelligence companies, at a time when government bond yields returned to rise after sharp declines last week.
Japanese markets are moving between improved risk appetite in stocks and anticipation of new monetary tightening, with almost complete pricing in for the Bank of Japan to raise interest rates to 1.25 percent next week.
The Nikkei index closed 2.12 percent higher at 66,399.84 points, recording the highest close since August 28, while the broader Topix index advanced 0.55 percent to 4,125.8 points. Technology companies led the rise, benefiting from the rise in US semiconductor stocks.
SoftBank Group shares jumped 11.22 percent, while memory company Kioxia shares rose 9.31 percent. Advantest and Tokyo Electron shares, which are linked to the chip equipment industry, also rose by more than 4 percent each. Kokusai Electric shares increased 7.64 percent after announcing its inclusion in the Nikkei Index starting in October as part of the periodic review of the index.
Mamoru Shimodi, chief strategist at Resona Asset Management, said that the decline in market volatility, along with efforts to contain bond yields and limit the weakness of the yen, made it easier for equity investors to return to increasing risks.
But Nikki's rise was not widespread. Of the more than 1,500 stocks on the main market of the Tokyo Stock Exchange, only 40 percent rose, compared to a decline of 56 percent.
“Sony Group” shares fell 2.7 percent, and banking shares also fell, with “Mitsubishi UFJ Financial Group” falling 1.96 percent, and “Sumitomo Mitsui Financial Group” falling 1.51 percent.
In the debt market, yields moved in the opposite direction after the significant declines recorded last week, as investors prepared for the 5-year government bond auction. The 10-year bond yield rose 2.5 basis points to 2.93 percent, while the 20-year bond yield rose 3.5 basis points to 3.74 percent, and the 30-year bond yield increased 4.5 basis points to 4.010 percent. The two-year yield rose 1.5 basis points to 1.84 percent, and the five-year yield rose 2 basis points to 2.245 percent.
Ultra-dated bond yields fell sharply last week, as investors dismantled bets on further steepening of the yield curve, coinciding with the decline in inflationary fears as a result of the strength of the yen, and rising expectations of the Bank of Japan tightening its monetary policy.
Takashi Fujiwara, senior fund manager for fixed income investments at Resona Asset Management, said that investors are currently focusing on the five-year bond auction, at a time when the market is starting to form a clearer picture of how far the Bank of Japan can go in its interest rate hike cycle.
This shift is clearly visible in the financial markets. According to Tokyo Tanshi Financial Consultants, the markets are almost completely pricing in an increase of 25 basis points at the Bank of Japan meeting next week, bringing interest rates to 1.25 percent. A further increase to 1.5 percent is also fully priced in by the January meeting.
The one-month overnight interest swap rate, which begins after two years, settled near 2.3 percent on Monday, after reaching a record level of 2.52 percent last week, reflecting expectations that the tightening cycle may extend beyond the expected increase. Monday's movements reveal a continuous repricing of Japanese assets, as technology companies are currently benefiting from the strength of the global chip sector and low market volatility, while bonds face a more complex test, with rising interest rates and increasing government financing needs.
The Bank of Japan remains the deciding factor in the next direction. If he raises interest rates next week, as markets expect, and leaves the door open for another increase, pressure on bonds may continue, while the performance of stocks will increasingly depend on the ability of corporate profits, especially chip and artificial intelligence companies, to offset the impact of rising financing costs and the strength of the yen.
