Some investors are starting to position for a scenario Japan hasn¡¯t faced in decades, as rising oil prices and a weaker currency stoke stagflation worries and force a rethink of bets.
Global funds including Allianz Global Investors and Amundi are already hedging against stagflation ¡ª a mix of rising prices and slowing growth ¡ª with the Iran conflict nearing the one-month mark. Allianz has reinforced its underweight view on Japanese government bonds (JGBs) and turned neutral on equities and the yen while using options to hedge volatility. Amundi has trimmed its overweight stance for Japanese stocks and is neutral on the nation¡¯s currency, with intervention risks in mind.
While stagflation isn¡¯t the central scenario for most investors in Japan, the risk carries a lot of weight for an economy that only recently emerged from decades of deflation. A slide into stagflation would challenge the country¡¯s recovery narrative and broader investment case. Wages are rising, but investors warn that a prolonged period of elevated oil prices could erode those gains before they translate into stronger spending.
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