BoJ Rate Hike Was Expected, Same Day Effect Limited Given Global Situation (EWJ)

The Bank of Japan raised interest rates for the first time in 6-years -- raising the overnight call rate to 0.25% from effectively zero percent. Jesper Koll, the often-cited chief economist of Merrill Lynch Japan commented that it was "absolutely" the right move at the right time (Tokyo-AP).

Unfortunately for investors this move by the BoJ was largely anticipated and could not spark a rally in stocks given the mounting global geopolitical tensions and rising petroleum prices. The Nikkei 225 Stock Average traded lower all day closing down by 1.67%.

One very important message from the BoJ's statement is that "an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time."

The BoJ also noted that the "economy continues to expand moderately" and "is likely to expand for a sustained period."

An AFX newswire article carried on Forbes.com summarizes the main points from the BoJ's statement.

A Bloomberg.com article looks at how the yen could be hurt by the BoJ maintaining a 0.25% rate for the remainder of the year. The issue is that US and EU central banks could raise rates further, thus increasing the yield gap. This would hurt American and other foreign investors in Japanese ADRs and ETFs in terms of currency conversion profit (loss). However, this would be viewed at least partially positive for Japan's exporters.

Japanese stocks are now down 4+% over the past four-trading days and the Nikkei is once again trading under 15,000. Despite the Nikkei's struggles since the Fed's May 10th rate hike extending to today, I still like Japan as an investment and especially over the next year or two. In the short term Japan will be vulnerable as all countries are to external pressures. However, the Japanese economy is both expanding and normalizing at the same time. There seems to be a lot of upside yet in the financial sector and in general across most sectors, upward earnings revisions are expected to come beginning this earnings season through this autumns.

iShares MSCI Japan Index ETF (EWJ) 1-year chart:

Comments

[Enzio von ...:]

It seems as if our view re. "tribal" policy0-making has prevailed: rates will stay at this level for a long time, according to Steven's quotation above. The reason is simple: with debt/GDP standing at 150% and with debt servicing costs gobbling up 22% of all budget outlays at this low level of rate, there is no way that rates can be hiked.

Our concerns with Japan, however, lie elsewhere.

2006 Jul 17 11:51 PM

[Steven Towns:]

Enzio -- What type of concerns do you have with Japan?

I think the big concern to have right now is mostly politically oriented with Koizumi stepping down this September.

Oil prices are another concern and are certainly having an impact on prices and of course could go even higher.

I don't think a consumption tax hike is an issue at least not until 2008.

Lastly, I don't see much real threat from North Korea but I do think Japanese stocks could be held hostage so to speak by geopolitical events in the Middle East and elsewhere. So if other advanced economy stocks are struggling chances are Japanese stocks might follow suit.

2006 Jul 19 06:53 AM