How Japan’s New Economy Could Affect Your Investments
Wednesday, April 11th, 2007
By George Leong, B.Comm. for Profit Confidential
The prospects for the Japanese economy continue to be encouraging. The country’s decade of deflation and flat growth is fading into the history books.
Japan may face higher interest rates as yields remain relatively high with the benchmark Japanese 10-year government bond yielding about 1.62%. Higher yields suggest a near-term increase in interest rates by the Bank of Japan and the beginning of a new trend of higher interest rates, which have also occurred in many other countries. Many pundits believe the Japanese economy has gained enough footing for the central bank to raise interest rates again. Recent household spending data in Japan was much stronger than expected, up 1.3% in February versus the 0.6% estimate.
By all indications, the Bank of Japan will increase interest rates, but, at the same time, it wants to make sure that it doesn’t put a damper on the economy and Japan’s renewed enthusiasm. The central bank increased its target for overnight loan rates to 0.5% in late February, the second time it has increased this rate in a year. The consensus is calling for a potential rate hike to materialize in the third quarter.
Previously, the central bank had ended its super-easy monetary policy that had pegged interest rates at zero. Now it’s hinting at increasing rates.
The Nikkei 225 continues to trade just off its five-year high on a rising trendline. The rise in the index reflects the steady improvement in corporate Japan.
The reality is that regardless of when Japanese interest rates rise, the trend is up. Higher Japanese rates may also hurt the flow of investment capital into higher-yielding U.S. bonds, which has been a favored destination for Japanese capital during the past decade. The demand for U.S. bonds helped support the U.S. dollar, but, should Japanese interest rates rise to a point where they are attractive, we could very well see a decline in the flow of capital into U.S. bonds.
This shift could pressure the U.S. dollar as Japanese investors would need to buy fewer U.S. dollars to use to buy U.S. bonds. The aftermath could put some pressure on the U.S. to increase interest rates on bonds to help attract investors, and this would inevitably impact stocks. This is just something to think about.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
