📝BoJ Policy Change Will Drive Yield Higher, Undermine Equities:UBS Strategy

The Bank of Japan can control either the yen or yields. Its mixed success in defending the yen this year is a more important driver in its surprise decision to widen the yield curve control band to -0.50./0/0.50./0 from -0.25%/+0.25% than building inflationary pressures. That the change was made under Governor Kuroda's watch ahead of his expected departure in April 2023 is a major surprise.

The initial pass-through to global markets is a 4 figure selloff in USDJPY, a spike in global yields (UST lOy yield +11bp), steeper yield curves, and weaker equities, led by the Nikkei 225. The extent to which these moves continue depend on whether the change in policy is a sign of further tweaks to come. The 003's ultra-accommodative stance is in the midst of a major change. Although the Bo] cites "extremely high uncertainties for Japan's economy", it observes improving corporate profits, business sentiment, employment and income. Further changes should be priced in and interest in USDJPY topside should diminish.

For global markets, the correlation between equities and bonds has turned increasingly positive through December. Pricing in further changes to BoJ policy will drive yields higher and undermine equities. Year-end liquidity issues will also hamper bonds' price discovery process. Higher UST yields and higher US rates vol should see initial broad-based USD weakness reverse with the exception of the JPY.

Trades Recommended by UBS:

1. TPNBNK (Topix Banks sector upside - would hedge against NKY rather than Topix).

2. UBJPYENB (Japan Dollar Yen Bottom) - Top names in Japan that could outperform with USDJPY lower.

3. Long Topix versus short NKY - Topix is heavier weighted towards Japanese financials/insurers over NKY.

4. Short TPTRAN sector - Autos exposure as the sector is not expensive but would be under pressure with stronger yen appreciation, being export driven.

- UBS Strategy