Bank of Japan's rate hike sets 'positive backdrop' for Japan equities

For the first time in 17 years, the Bank of Japan has hiked interest rates, up to a range of 0% to 0.1%. In response, the Yen has begun to slide against the US Dollar. The change to the nation's key policy rate comes ahead of the Federal Reserve's Wednesday monetary policy decision.

BlackRock Senior Strategist Kristy Akullian joins Yahoo Finance to give insight into how investors may frame the Bank of Japan's decision for their portfolios.

Akullian states: "We think [the decision] sends a really positive backdrop for Japan and Japan equities, and I think on how investors can think about that more broadly in their portfolio, is just another way to maybe diversify away from some of the remarkable concentration that we see in the US equity market. We're constructive on US equity markets but we actually see opportunity for investors to add Japanese equities here, as well."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

SEANA SMITH: A historic move by the Bank of Japan. The central bank raising its key policy rate for the first time in 17 years. The yen sliding against the dollar. You also have yields moving to the downside. Now, the Bank of Japan's action coming ahead of the Federal Reserve's decision tomorrow. We want to bring in Kristy Akullian, BlackRock senior investment and portfolio solutions strategist. Kristy, it's great to have you here on set.

KRISTY AKULLIAN: Thanks for having me.

SEANA SMITH: So start with the news out this morning. Bank of Japan, the big headline here, in terms of what this means, ripple effects beyond Japan. Talk to us about how you're looking at this from a strategist perspective.

KRISTY AKULLIAN: Yeah, so, you know, I think that it's important that we note how momentous the moves were out of Japan that we saw this morning. I know we've talked about it a bit. But the first rate hike in 17 years. A return out of the very abnormal situation of negative interest rates and into positive interest rates. We think that sets a really positive backdrop for Japan and Japan equities.

And I think how investors can think about that more broadly in their portfolio is just another way to maybe diversify away from some of the remarkable concentration that we see in the US equity market. So we're constructive on US equity markets, but we actually see a lot of opportunity for investors to add Japanese equities here as well.

BRAD SMITH: And this is not significant enough to throw off, say, a Warren Buffett who's invested further into Japanese trading houses. We know in recent years, I mean, this is-- and for those who have subscribed to that same kind of Buffettology, if you will, of the markets, this is not enough to throw a wrench in that, right?

KRISTY AKULLIAN: No. I think that the broader macro tailwinds that we're seeing from Japan moving out of deflation and into an inflationary regime are enough to offset some of the headwinds that we might see from a stronger yen.

SEANA SMITH: Kristie, this, of course, comes ahead of the Fed decision tomorrow. A lot of the focus is going to be on that dot plot. What exactly the economic projections are showing. What is your base case at this point. And do you think the market's a bit too optimistic about how many rates we are going to see or the degree of those rate cuts before the end of the year.

KRISTY AKULLIAN: Yeah, so, I mean, if we go back and even just think about how we came into this year, the market was expecting almost seven rate cuts. And there was also 100% chance of a cut tomorrow in March if we went back to January. Now, where we sit there's about a 0% chance. So as you point out, we're not watching to see if the Fed is going to move. We're watching to see what the dot plots and the expectations are forward policy are going to look like.

So our view has always been that we think that there's probably going to be about three rate cuts this year, potentially starting in June or July. I think what we're going to get tomorrow from the Fed, and what we're watching to see if Chair Powell can navigate here is leaving himself some optionality. And I think the dot plot is going to show us that we're still probably going to get maybe median three cuts here. But I think the risk is that it moves to 2 rather than it moves to 4.

SEANA SMITH: How much does that matter for the equity market?

KRISTY AKULLIAN: I think that some of the reaction of that has already been priced in since we've already seen so many of those cuts come out of the market just since January and in year to date. But I do think that it can matter for the lower quality parts of the market. So if we look at things like small caps and we look at really highly levered companies, they've struggled a bit this year, and I think they can continue to struggle.

So what we prefer instead is really staying, I mean, up in quality, up in market cap. We like something like QUAL, is the MSCI iShares quality factor ETF. That's performed well last year and this year. And we think it can continue to do so, especially if at the margins we start to see cuts coming out of the market rather than going into it.

BRAD SMITH: Do you think that-- and I was looking through your BlackRock weekly market commentary that the team puts out. And it had within there that inflation is likely to settle above the Fed's 2% target in 2025. So with that lead time, I mean, what does that spell out for consumer sentiment? What does that spell out for business confidence as well in that near term period?

KRISTY AKULLIAN: Yeah, so, I mean, I think that there's a few different drivers of inflation happening. What we saw during the pandemic was obviously a supply side crunch. And so I think that led to more temporary inflation and the transitory that, you know, it was probably a dirty word now when we look back at it.

BRAD SMITH: We've got it on another T-shirt at this point.

KRISTY AKULLIAN: Yeah, exactly. I think that we see some broader mega forces happening in the economy, global economy that can lead to some of that higher structural inflation. So things like demographic changes are things that we're focusing on for the kind of medium term. I think the more important thing for right now is that we think inflation can be a little bit volatile throughout 2024.

And so maybe it's not just when the Fed starts cutting but how many times this year. And again, it all kind of leads us back to this up and quality trade as being the best place to camp out when there's that amount of uncertainty and volatility that we should expect.

BRAD SMITH: Kristy Akullian, who is the BlackRock senior investment and portfolio solutions strategist. Thanks so much for taking the time here in studio.

KRISTY AKULLIAN: Thanks for having me.