Pasquariello: Japanese stocks are excelling on the back of lower JBG yields and weaker JPY

Japanese equities (NYSEARCA:EWJ), (DXJ) are “reasserted themselves,” said Tony Pasquariello, global head of hedge fund coverage and global markets division at Goldman Sachs, in a markets/macro note.

The NIKKEI 225 Index (NKY:IND) broke out above the 40,000 levels — currently almost at 40,960, up 23% year-to-date, and the Tokyo Stock Exchange reached all-time highs to 2,884, up 21.88% year-to-date.

Pasquariello also noted that there is a “clear path of correlation” between the JGB yields (JGBT) or the U.S. dollar/Japanese Yen (USD:JPY) and the performance of Japanese banks.

“This recent rip was helped by the drift higher in rates (note 10-year JGB yields quietly pushed back over 1%) and a weak currency,” he said. “Spec positioning feels cleaner today when compared to the first time we traded these levels.”

Also, implied volatility is considerably lower than it was in the spring, “which again invites an opportunity to rent tactical length,” he said.