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from Asset Allocator

Looming volatility in Japanese markets poses questions for DFMs

One of the more interesting market events of recent weeks has been the appointment of a new governor of the Japanese central bank. 

The prevailing view in markets is that this could lead to a change in the 'yield control' policy, which has been at the centre of the monetary policy of that country for quite some time. 

The yield curve control policy is designed to force interest rates to a target level. This should mean yields are lower, and prices are higher, than would be the case in normal market conditions.

Market reactions to the possibility of a steep change in the yield curve control policy was to send Japanese equities downward in price by around 1.5 per cent in a single day, while the Japanese government bond yield rose to a two-decade high. 

The impact of recent policy news can be seen in the relative performance of the IA Japan vs IA Global sector in 2023 so far.

More recently the weakness of the yen has prompted Japanese investors to sell their overseas bond holdings as the cost of currency hedging rises.

All of this has prompted us to have a look at the levels of Japanese equity fund exposure among the allocators we cover. 

Coming into 2023, the average level of exposure to Japanese equities in the balanced portfolios was 3.5 per cent, compared with 3.2 per cent at the end of September and 3.1 per cent in July. 

As ever there are outliers, with You Asset Management having 8.7 per cent in the Japanese equity funds and AJ Bell having 6 per cent in the asset class.

At the other end of the spectrum, Invesco has just 1 per cent of its Balanced portfolio allocated to Japanese equity funds, while Tacit and Wise are among the firms with nothing in Japanese equity funds. 

In the income portfolios we cover, the average allocation is 2.5 per cent. In the Cautious portfolios we monitor, Japanese equity funds account for just over 1 per cent of the capital deployed. 

The most widely-owned Japanese equity fund among the allocators we cover is Jupiter Japanese Income, which appears in 8 of the Balanced portfolios we cover.

The next most widely owned Japanese equity fund among the allocators we cover is Baillie Gifford Japan, which appears in seven of the portfolios we cover, and had two new buyers and two new sellers in 2022.

The same company's Japanese Income Growth product appears in four of the portfolios we cover, a net of one new buyer in 2022. 

With changes at the central bank level, Japanese markets could be among the more volatile markets in the coming year, so Asset Allocator will revisit our databases later on to see what might be changing at the investment level. 

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