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The Bank of Japan (BoJ) has finally ended the era of negative interest rates by raising the policy rate to +0.1%. It is Japan’s first interest rate hike in 17 years. “But the fact that the rate is still near zero highlights BoJ’s decision to remain cautious in view of the economy’s fragile recovery,” opines Ivailo Dikov, Head of Japan Equities at Eastspring Investments.
According to him, BoJ’s move was not a big surprise, and overall, the market moves were not significant. Only bank stocks saw some weakness after the announcement.
“Going forward, we may see a stronger yen if the BoJ gets more hawkish and the US Fed more dovish,” says Dikov. “A stronger yen will impact Japanese exporters; we may see softness in autos, materials, tech and machinery stocks. On the flip side, importers will benefit. But we believe that even if the yen strengthens back towards 130 against the USD, it is still a comfortable level for most exporters.”
Given the numerous longer-term structural tailwinds, Dikov sees the long-term investment case for Japanese equities intact.
Goh Rong Ren, a Director in Eastspring’s Fixed Income Team, believes that the extent of BoJ’s policy normalisation is likely to be fairly limited. “Thus, future broader USDJPY moves will be driven by the US Fed’s rate-cutting trajectory. This is especially so given that USDJPY correlates very well with the US-Japan interest rate differential,” he says.
Read the full insight on eastspring.com/lu.
