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📝YCC Policy Revision to Entail A 2% Decline In Corporate Earnings: J.P. Morgan Strategy

According to a Bloomberg survey on July 20, the market sees the possibility of a change in YCC being 18% in July, 10% in September, and 28% in October. The yield gap between 10-year JGBs and swaps is about 20bp, below the levels seen in October 2022 and December 2022 through January 2023. The market is attentively watching for any policy changes at the BoJ’s monetary policy meeting in July, and even if there are no changes this time around, we believe the time is nearing for a change in YCC policy, and thus see the need to examine the potential impact on share prices.

If YCC policy is revised to allow for wider fluctuations in the target interest rate range (from 50bp to 100bp), the impact on Japanese equities would probably entail at most a 2% decline in corporate earnings (assuming the yen does not strengthen more than ¥5/$; Figure 5). While share prices might overreact in the short term, a change in YCC policy would signal there are changes in the economic structure, namely a transition from a deflationary economy to a normal inflationary economy. In this context, it would not be unusual for the multiples of stocks with low share-price valuations, which declined as interest rates fell, to increase back up to normal levels. The market is well aware of the potential impact on share prices from any changes in YCC policy, but we believe revisions to YCC will not impact share prices as much as past changes did, considering its impact on fundamentals has decreased, and also its impact on multiple normalization. - J.P. Morgan Equity Strategy



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