Subjective market review (9-Feb-2024). In Japan, are we facing a cycle of Western-style interest rate hikes? Not necessarily...maybe just one hike and done.
This scenario would be ideal for Japanese shares. The Nikkei 225 is already +10.3% this year (vs. S&P500 +4.8%. Nasdaq100 +5.7%, EuroStoxx50 +4.0%, WIG30 -0.97%). And since January 2023, Nikkei has increased by as much as +43.48% - see Figure 1.
Why can't we count on a series of Western-style rate hikes in Japan? Because the central bank itself says so..., or more precisely, Deputy Governor Ucheda Shinichi, February 8, 2024, Speech at a Meeting with Local Leaders in Nara:
“(…) even if the Bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly. The Bank would, I think, maintain accommodative financial conditions even if the termination were to take place. (…) the Bank does not project that inflation will significantly exceed 2 percent. (…) the current situation is that Japan's real interest rates have been substantially negative and financial conditions have been highly accommodative. This situation is not expected to change much.”
Additionally, Ucheda pointed out two things that rule out rate increases in like Western countries:
(i) in Western countries (USA, Euro Area) inflation has jumped to levels above 8%, and the current situation with inflation in Japan is completely different, and
( ii) inflation expectations in the West are anchored around 2%, while in Japan they are just heading there... therefore a loose monetary policy is still needed to allow inflation expectations to continue to rise, not to mention the risk that they may start to fall again.
Ucheda Shinichi:
“(…) in both the United States and the euro area, inflation was above 8 percent when central banks began raising their policy interest rates in 2022, which gave rise to a significant risk of undermining people's confidence that inflation would be at around 2 percent over the medium to long term. The current inflation situation in Japan is markedly different. Another difference with Europe and the United States, where medium-to long-term inflation expectations have been anchored at 2 percent, is that those expectations in Japan are still in the process of climbing toward 2 percent. This means that an accommodative monetary policy is needed to lift inflation expectations further and to be mindful of the risk that they would fall again.”
Such statements were enough for the Yen to weaken against the dollar by 0.8% on February 8 (USDJPY +0.83%) and the Nikkei to surge by 2.1%.
However, the rates of return on the Nikkei 225 expressed in other currencies will be lower if the yen weakens - see Figure 2.
However, this is not a problem for investors - on the financial markets you can easily hedge the currency risk yourself or simply buy an outright ETF for Japanese shares with hedging already being built in, e.g. iShares MSCI Japan EUR Hedged UCITS ETF.
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