J O Hambro: Japan’s interest rate

Commenting on the decision by the Bank of Japan to keep overnight interest rates at 0.5 per cent, Scott McGlashan, manager of the JO Hambro Capital Management Japan Fund, said: “This is no real surprise, though I anticipate an increase of 0.25 per cent by year end as the Bank of Japan moves to normalise rates. Recent strength in the yen, which has generated capital losses on overseas investments, plus a narrowing of interest rate differentials, is likely to reduce, if not reverse, capital outflows from Japan.

“This is bullish for Japanese bonds and equities. Although the popular perception is that a strong stock market requires a weak yen (as has been the case since 2003), historically, a strong yen and strength in Japanese stocks have gone hand-in-hand as most Japanese companies’ profits benefit from a rising yen. If the market goes up, more capital is likely to be reinvested in Japan, further strengthening the yen and further encouraging domestic investment – a virtuous circle.

“Going forward, the Japanese stock market could prove to be the big winner from the sub-prime fiasco as Mrs Watanabe, the archtypical Japanese saver, keeps more of her money at home.”