March 18 2024

The Bank of Japan is likely to raise interest rates for the first time in 17 years at its March meeting this week which would impact financial markets around the world.

This is the prediction from Nigel Green, the CEO of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations.

In January 2016, Japan shocked global markets by introducing negative interest rates as an unconventional monetary strategy to address deflation and bolster economic expansion.

This move came after Japan grappled with deflation, sluggish growth, and a persistent liquidity trap since the collapse of its asset bubble in the early 1990s. Despite employing measures like quantitative easing to spur inflation and economic activity, the Bank of Japan found these tactics inadequate by 2016.

The deVere CEO says: “With stronger-than-anticipated salary gains at the annual ‘shunto’ wages negotiations and no denials from the central bank on the issue of rate hikes, we now expect the Bank of Japan to raise them on Tuesday.”

He notes that he expects to see several direct and indirect impacts as a result of the major policy shift.

“Anticipate volatility in Japanese stocks as investors recalibrate their portfolios in response to the policy shift. Industries sensitive to interest rates, such as financials, could witness notable turbulence.

“Changes in Japan’s interest rate policy could also ripple through global bond markets, affecting the yields and prices of Japanese government bonds (JGBs) significantly. This can be expected to prompt investors worldwide to reassess their bond portfolios.”

Nigel Green moves on to say that adjustments in Japan’s monetary policy could trigger volatility in global equity markets.

“Sectors closely tied to Japan, such as automotive and consumer electronics, may experience stock price fluctuations influenced by currency movements and the performance of major Japanese corporations.

“The performance of leading Japanese companies like Toyota, Honda, Sony, and Panasonic heavily influences investor sentiment toward these sectors.”

Another notable impact is the potential reconsideration of global portfolios by Japanese investors if domestic assets become more appealing with higher interest rates.

“This could lead to capital outflows from foreign markets, potentially affecting asset prices, especially in regions and sectors previously favoured by Japanese investors.”

The deVere CEO concludes: “If Japan ends the world’s last negative interest rates this week, the impact goes well beyond the country’s borders and investors should be agile.”