The
Bank
of
Japan’s
(BoJ)
decision
to
end
its
negative
interest
rate
policy
had
been
expected
by
markets
for
a
long
time.
But
the
announcement
on
March
19
did
feel
like
a
turning
point
for
one
of
the
best-performing
stock
markets
in
recent
years;
after
all,
the
last
time
the
BoJ
raised
rates
was
in
2007,
the
year
Netflix
(NFLX)
first
streamed
its
content,
and
MySpace
was
65
times
more
valuable
than
Facebook
(META).
While
the
rise
in
interest
rates
generated
a
lot
of
headlines
and
commentary,
markets
shrugged
and
continued
the
familiar
pattern
of
rising
share
prices
and
a
falling
yen:
the
main
indices
rose
and
the
yen
rose
above
150
against
the
dollar,
a
new
all-time
low.
Despite
recent
success,
Japan’s
stock
market
history
is
peppered
with
false
dawns,
so
the
key
question
for
investors
is
whether
the
wins
can
be
sustained.
A
country
rally
in
one
year
is
often
by
a
country
slump
the
next:
China
was
one
of
the
best-performing
world
markets
in
2020.
It
has
struggled
since.
My
colleague
Leslie
Norton
outlined
in
a
recent
article
why
Japan
can
have
another
great
year
in
2024,
but
it’s
all
to
play
for.
Weak
Yen,
Strong
Exports.
Will
That
Change?
A
key
topic
for
investors
to
account
for
is
Japan’s
weak
currency,
which
makes
its
exports –
think
robotics,
cars
and
computer
games
– much
cheaper
for
foreign
buyers.
But
investors
bearish
about
Japan
expect
interest
rate
hikes
to
end
the
era
of
a
weaker
yen.
That’s
because
a
rise
in
interest
rates
make
a
country’s
currency
more
appealing
to
investors,
attracting
capital
flows.
US
government
debt
has
always
been
attractive
to
overseas
investors,
but
with
the
Federal
funds
rate
at
5.25%,
this
offers
a
“risk-free”
yield
that’s
above
inflation. My
colleague
Fernando
Luque
has
looked
at
this
in
more
detail.
The
yen
recovery
hasn’t
happened
yet
–
mainly
because
markets
don’t
think
the
BoJ
is
embarking
on
a
tightening
cycle
that
will
harmonise
Japanese
and
Western
interest
rates.
For
comparison,
the
cost
of
borrowing
in
Japan
is
between
0%
and
0.1%. In
the
UK
it’s
5.25%.
In
the
Eurozone
it’s
4.5%.
Morningstar
analyst
Lorraine
Tan
argues
the
BoJ
is
likely
to
be
cautious:
“we
think
the
BoJ
will
be
prudent
in
its
moves
to
raise
rates
further,
given
that
the
Japanese
government
bears
the
risk
of
having
to
pay
higher
interest
costs.
“Also,
with
more
than
80%
of
borrowers
holding
floating
rate
debt,
large
moves
are
likely
to
be
avoided.
While
interest
rates
are
rising,
they
remain
at
a
low
level
and
we
do
not
expect
any
impact
on
loans
demand
and
see
loans
growth
maintained
at
a
low-single-digit
pace.”
She
argues
a
rate
increase
will
help
banks,
which
should
“enjoy
stronger
earnings
growth
over
the
next
three
years
with
return
on
equity,
or
ROE,
increasing.”
When
interest
rates
rise,
banks
earn
a
higher
net
interest
margin
(NIM) –
the
difference
between
money
paid
out
on
deposits
and
money
made
on
loans.
Should
I
Invest
in
Japan
Now
Rates
Have
Risen?
But
that’s
all
very
domestic.
Investors
in
the
UK
and
Europe
will
want
to
know
if
they
should
change
their
view
of
Japan
and
its
markets.
“We
think
the
main
reason
overseas
investors
can
be
long-term
positive
on
Japan
is
the
return
of
inflation
will
provide
a
boost
to
spending
and
drive
capital
reinvestment,”
Tan
says.
“Its
decades-long
deflation
discouraged
Japanese
companies
from
reinvesting
domestically
and
also
saw
house
prices
slip.
Now
that
there
appears
to
be
some
prospect
of
rising
prices,
we
hope
that
this
will
lead
to
a
sustained
changed
mindset
towards
domestic
investment,
and
that
this
will
lead
to
increased
consumption.
“However,
should
the
yen
appreciate
as
quickly
as
it
fell,
some
of
these
drivers
could
be
diminished.
We
think
overseas
investors,
however,
should
be
hedged
in
that
regard
as
a
strengthening
yen
should
help
counter
a
possible
slip
in
share
prices.”
In
a
recent
seminar,
Pictet
Japan
fund
manager
Sam
Perry
argued
the
link
between
a
stronger
yen
and
weaker
equity
returns
was
not
grounded
in
reality.
Neither
is
there
any
sense
that,
domestically,
Japan
is
in
bubble
territory,
he
said.
“Strange
things
are
happening
in
small
parts
of
the
market,”
he
said,
but
overall
Japanese
retail
investors
are
not
gripped
by
trading
frenzy – which
is
often
a
sign
a
market
is
about
to
collapse.
Japanese
Bonds: on
The
Menu
Again?
But
the
most
obvious
impact
of
all
will
be
on
fixed
income.
“The
BOJ’s
19
March
policy
changes,
while
largely
anticipated,
should
have
minimal
immediate
market
impact,
says
Tomoyo
Masanao,
co-head
of
Asia-Pacific
portfolio
management
and
co-head
of
PIMCO
Japan.
“However,
the
medium-
to
long-term
implications
could
be
significant,
as
the
potential
scale
of
the
BOJ’s
policy
changes
may
be
more
than
the
financial
markets
currently
anticipate.”
“For
investors,
the
Japanese
bond
markets
should
start
offering
a
higher
risk
premium
and
modestly
higher
yields
in
response
to
the
BOJ’s
continued
policy
adjustments
and
the
transition
of
government
bonds
back
to
market
forces.
“As
the
market
digests
the
new
and
evolving
policy
stance,
there
will
be
tactical
opportunities
for
active
managers
to
capitalise
on
the
inefficiencies
in
the
Japanese
bond
and
interest
rate
swap
markets
during
this
period
of
increased
volatility.”
As
such,
investors,
wary
of
the
market
for
obvious
reasons,
may
be
drawn
back
into
Japanese
bonds
as
yields
improve.
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