The Rising Sun's Financial Rays: Japan's Impact on Global Markets
Japan's Negative Interest Rates: A Global Ripple Effect
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Japan's Status as a Global Creditor
Let's talk about Japan and its interest rates – the cost of borrowing money.
Last week, the Bank of Japan decided unanimously to keep interest rates at -0.1%.
Japan has been the world’s largest net creditor for more than three decades.
The BOJ has maintained an accommodative monetary policy despite inflation consistently exceeding the 2% target for more than 24 months.
The global money printer is still going strong.
Policy changes are not expected until at least their next meeting on March 19th, 2024.
Now, why should you care if you're sitting in the good ol' USA?
Some of that money flows over to the United States.
Japan's policy of keeping its interest rates extremely low, including negative interest rates, encourages investors in Japan to seek higher returns elsewhere.
This leads to the "carry trade," where investors borrow money in Japan at low rates and invest it in higher-yielding assets abroad, such as US bonds or stocks.
The inflow of Japanese investment into the US stimulates the economy, especially in sectors like real estate, artificial intelligence, and semiconductors.
We expect to see Japanese lenders continue to invest in US commercial real estate.
Transaction volumes from Japan hit their highest yearly figure in two decades, more than double last year. Source
When all this happens, this can result in a resilient US stock market that surpasses traditional valuation norms.
Is this an oversimplification?
The interactions between interest rates, investment behaviors, and economic outcomes are complex.
But it’s not rocket science.
Simply put, low interest rates are beneficial for borrowers.
Japan's monetary policy positively impacts the U.S. stock market, countering bearish expectations of downturns.
Those that benefit the most are new borrowers or businesses looking to refinance with strong Japanese ties.
The agility and resilience of the US economy have historically allowed it to adapt and respond to changes in foreign investment patterns, mitigating the risks of over-reliance on a specific foreign economy like Japan's.
But the list of those willing to pile on US debt is getting slim.
Factors that might shift our optimistic (bullish) assumptions to pessimistic (bearish) include:
Larger than expected buildup in the Treasury General Account
Sharp drop in available treasury issuance
Forced deleveraging by a major market speculator
Restrictive shift in policy from the Bank of Japan to combat inflation
We believe the likelihood of one of these happening over the next few months is low.
Thank you for reading and I am grateful and humbled to be able to learn, grow, and invest alongside you at Tuttle Ventures.
Vision, courage, and patience leads to successful investing.
Darin Tuttle, CFA
NOTE - This is not investment advice. Do your own due diligence. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved. Unless there is a signed Investment Management or Financial Planning Agreement by both parties, Tuttle Ventures is not acting as your financial advisor or in any fiduciary capacity.