Bank of China Insurance Asset Management stated in a recent article that, last month, we mentioned that although the Bank of Japan maintained interest rates at the January policy meeting, the tone shifted towards a hawkish stance, indicating that monetary policy may normalize within the year, and the progress of the latest round of spring wage negotiations will be a key factor. As the saying goes, the preliminary results of the spring wage negotiations in Japan have been gradually announced, with nominal wage increases in several manufacturing industries exceeding 5%, which has not been seen in 30 years. It is reported that some well-known companies, such as famous car manufacturers and integrated beverage producers, have mostly responded to the pay raise demands put forward by the unions, with some large iron and steel companies even seeing double-digit wage increases. At the same time, the January national core consumer price index in Japan increased by 2% year-on-year, maintaining above 2% for the 22nd consecutive month. This seems to reflect that the "virtuous cycle between inflation and wage growth" that Bank of Japan Governor Haruhiko Kuroda had hoped to see is beginning to take shape. Market expectations for the Bank of Japan ending its negative interest rate policy at the March meeting are gradually increasing, and the yen briefly strengthened in response. Fund managers indicate that yen depreciation usually benefits the performance of the Japanese stock market. Historical data shows that when the yen's spot exchange rate rises, indicating yen depreciation, the Nikkei average index generally performs well, as the two are roughly inversely related, mainly because depreciation can boost local export performance. According to a survey of short-term economic outlook for businesses in Japan, most entrepreneurs are pleased with the ongoing weakening of the yen, while local manufacturers have high hopes for future sales due to the soft yen; based on record-breaking net operating profits recorded by some local industry leaders, this optimistic sentiment is not unfounded. Weakness in the yen has pros and cons: companies with a large scale of cross-border operations and a higher proportion of overseas income naturally benefit to a certain extent from exchange rate gains; on the other hand, yen depreciation may inevitably lead to increased costs for companies importing raw materials from abroad, so it is crucial whether these rising costs can be passed on. Fund managers have observed signs of an increasing number of Japanese companies being able to pass on the rising costs downstream recently, which may explain why the latest financial reports show that most local companies have seen profits exceed expectations and increase. At the March meeting, as expected by the market, the Bank of Japan announced the end of the negative interest rate policy implemented since 2016. Following the announcement, the yen did not strengthen. Fund managers believe that ending negative interest rates is different from policy tightening, and Governor Kuroda reiterated that even after the normalization of local monetary policy, Japan's financial conditions will remain loose, suggesting that the chances of continued rate hikes are slim; at the same time, Western central banks led by the Federal Reserve may not substantially reduce interest rates in the short term, meaning that there is a chance for a broad interest rate differential between Japan and abroad to continue for some time, making it difficult for structural weakness in the yen to reverse in the short term. However, speculative trading and news of changes in monetary policy may cause fluctuations in the yen, and the latest dot plot released by the Federal Reserve shows that the US may cut interest rates three times this year and next, which could lead to a strengthening of the yen against the dollar as interest rate differentials narrow, potentially reducing the support for Japanese corporate profits from exchange rates, thereby affecting the performance of the Japanese stock market. Nevertheless, the Japanese stock market still has solid fundamentals: economically, Japan's revised final GDP for the fourth quarter of 2023 rose by 0.1% on a quarter-on-quarter basis, successfully avoiding a technical recession, with significant upward revisions in corporate equipment investment. In addition, the March services Purchasing Managers' Index further increased. With Kuroda indicating that he does not expect the end of negative interest rates to cause a significant increase in mortgage rates or corporate borrowing costs, fund managers believe that the strong performance of Japan's service industry may provide a good incentive for local entrepreneurs to increase investment in a low-interest rate environment, seeking to seize more business opportunities from global travelers. In terms of fund flows, fund managers have observed a continued influx of foreign funds into the Japanese stock market, with global fund managers seemingly underweighting the Japanese market; coupled with Japan's actual negative real interest rates and reforms in the tax-exempt savings plan known as NISA (Japanese Individual Savings Account) that may help boost household savings' willingness to invest, and with the Tokyo Stock Exchange promoting corporate governance reforms and structural catalysts such as share buybacks by many listed companies to increase capital returns, local funds also provide strong support. In terms of valuation, even though the Japanese stock market has performed well recently, fund managers do not rule out the possibility of a consolidation in the short term, but in fact, the valuation of the local stock market is not excessively expensive, especially when compared to the US stock market: the TOPIX index, covering over 2000 listed Japanese companies, currently has a price-earnings ratio slightly higher than the 10-year average level by about half a standard deviation; and the price-earnings ratios of the TOPIX Mid 400 index and the TOPIX Small Cap index are even lower than their own 10-year average levels. With increased attention from domestic and foreign investors on the Japanese stock market, fund managers expect that some funds may try to explore investment opportunities in medium and small companies, allowing the market's upward trend, led by large-cap stocks, to gradually spread to the relatively underperforming mid and small-cap stocks. In conclusion, the Bank of Japan's adjustment of monetary policy may increase yen volatility, indirectly affecting the stock market, which still has decent fundamentals. After performing well in recent months, there is also a possibility of a certain adjustment, so from an asset allocation perspective, fund managers hold a neutral view on the Japanese stock market; however, they reiterate that when constructing a portfolio, investors should consider including the Japanese stock market in their regional diversification strategy. Depending on individual investment goals, one can find suitable tools to explore the Japanese market.