BoJ’s rate rise could be good news

The decision by the Bank of Japan (BoJ) to raise interest rates to 0.5% earlier in the week may serve to stimulate the Japanese economy rather than act as a break in the way that monetary tightening often affects other major economies. Notably, the Japanese are assiduous savers and are not burdened by debt like their Western counterparts. Consumers’ being paid additional interest on their savings is bullish for domestic demand.

In the statement that accompanied this weeks’ rate rise, the BoJ signalled a gradual approach to future hikes. “This is expected to give further impetus to the notorious ‘carry trade,’ a phenomenon that is leading to reduced returns on yen-denominated assets for sterling investors” according to Bambos Hambi, Head of MultiManager at Gartmore.

“The yen carry trade has involved investors borrowing and effectively selling the Japanese currency to invest in higher yielding assets overseas. This selling pressure has weighed upon the yen – particularly last year, and has been exacerbated by Japanese investors directing a proportion of their savings overseas in the search for higher returns.

“The BoJ’s somewhat dovish rhetoric has sent the yen tumbling to new lows against the dollar and the euro. Fundamentally, the currency is undervalued. A move higher from the current low point can therefore not be discounted. The yen’s weakness has yet to feature prominently on the political agenda, a reflection, perhaps, of the counterbalancing effect of the appreciation of the Chinese renminbi.The yen’s weakness is certainly benefiting Japan’s industrial base, with exports surging. Yen strength of any significance may see stock markets suffer a setback commensurate to that endured in May and June of last year.”

Having moved from overweight to neutral in the fourth quarter of 2006, the MultiManager team, while maintaining a watchful eye, has selectively increased exposure to the region.