How should you change your investment strategy in the era of rising Japanese interest rates?

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Japan has finally raised its benchmark interest rate from negative to 0% after 17 years. This is more than just a rate change, it marks a new inflection point for investors. With rates likely to rise further, it's time to change your investment strategy.

Today, we'll take a closer look at the impact of the Japanese rate hike on investments and how investment strategies may need to change to help investors prepare for this change.

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1. Japan raises interest rates, why now?

The Bank of Japan has implemented a negative interest rate policy since 2016 to spur economic growth. However, prolonged negative interest rates have had side effects, such as deteriorating financial institution profits and making life difficult for retirees. In addition, the recent weakening of the yen has increased inflationary pressures in Japan by boosting import prices.

The Bank of Japan has decided to raise the benchmark interest rate in order to stabilize the economy and stabilize prices. However, due to the prolonged negative interest rate policy, the Japanese economy has been expecting what will happen to interest rates, but it seems to be a little different than expected. In any case, there are concerns about the speed and scope of the rate hike.

2. expectations of yen appreciation, investment opportunities and risks

1) Stronger yen, lower returns on overseas investments

• An increase in interest rates leads to an increase in the value of the yen.
• This can lead to lower returns when investing abroad.
• In particular, you should be careful when investing in dollar-denominated assets.

2) Increasing attractiveness of the yen, need to change investment strategy

• A stronger yen makes investing in yen-denominated assets more attractive.
• Consider investing in Japanese government bonds and Japanese stocks.
• We believe that the yen has not yet strengthened and there is a good chance that it will in the future.

3) Yen Investment Strategy: Short-Term vs. Long-Term

• Short-term investments: Yen-denominated deposits, yen-denominated bonds, etc.
• Long-term investments: Japanese stocks, Japanese real estate, etc.
• When investing, we recommend using a portfolio to determine your allocations and rebalancing by weight.

 

2. Increased volatility in the Japanese stock market, investment opportunities and risks

 1) Interest rate hike, impact on Japanese stock market

• Rising interest rates can negatively impact interest rate-sensitive industries, such as finance and real estate.
• However, export industries can be positively impacted by a weaker yen.
• Rising interest rates could lead to increased profits for financial institutions. You may want to consider investing in financial institution stocks.
• Value investing strategies that focus on dividend yield rather than growth also work well.

 2) Investment Strategy: Industry-Specific Stock Selection Is Important

• Rate-sensitive industries vs. export industries
• Consider your company's financial health, growth potential

3. rebalance your investment portfolio, diversification is key

   1) Need to rebalance your investment portfolio

• Raising the interest rate in Japan will change the investment environment, and there are a lot of dampeners in place now, so I don't see a drastic change in volatility or risk at the national level, but I think it will eventually move in the right direction over time.
• You should prepare for the change by rebalancing your investment portfolio. The yen is still undervalued. However, as we move forward in the current direction, there is a high probability that interest rates will rise further and the yen will strengthen. If that happens, the price of the yen will also rise, so it would be better if you had bought stocks or bonds before then.

 2) Emphasize the importance of diversification

• Diversification is important, not focusing on a single asset or country
• Invest domestically, internationally, and across asset classes
• No matter how directional things look, it's always important to recognize and hedge your risks

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4. Be flexible to change!

1) The need to consult expert opinion

• Get expert opinion before deciding on an investment strategy
• Stay informed, make smart investment decisions

2) How you acquire information: Blogs, news, expert reports, etc.

• Leverage blogs, news, expert reports, and more

3) Need to take the long view and react to change.

• It's important to be flexible to respond to changes in the investment landscape.
• Interest rate hike era, watch for a global rate hike.
• When you need to look at the direction and think about which wave to ride rather than taking the long view and tackling each article one by one.

Reference:

• https://www.kita.net/cmmrcInfo/cmmrcNews/cmmrcNews/cmmrcNewsDetail.do?pageIndex=1&nIndex=72270&sSiteid=1
• https://m.newspim.com/news/view/20231115000008
• https://www.tossbank.com/articles/23871