The recent interest rate hike, the first since 2007, has not dampened the momentum of Japanese shares, which continue to reach new heights. This surge is attributed to signals that deflation may be ending, spurring bets on Japan's economic expansion. Additionally, a weaker yen is benefiting exporters like Toyota Motor Corp. and Canon Inc., with Morgan Stanley predicting the broad Topix equity gauge could rise further.
Typically, central bank rate increases would be expected to negatively impact shares by raising borrowing costs. However, the unique economic conditions in Japan, including the end of the Bank of Japan's negative-rate policy and an emphasis on improving shareholder returns, have attracted significant foreign investment. The Nikkei 225 Stock Average has notably surpassed 40,000, reaching all-time highs.
Investor sentiment towards Japan was notably positive ahead of the Bank of Japan meeting, with a majority expecting the economy to strengthen. Even after the central bank's rate hike on March 19, Morgan Stanley maintains an overweight stance on Japanese equities, suggesting a focus on sectors like food and real estate that could benefit from the end of deflation.
The involvement of foreign investors, including Warren Buffett (Trades, Portfolio), has played a significant role in driving Japanese stocks to record levels. Data from the Tokyo Stock Exchange shows net buying by foreigners in nine out of the first 12 weeks of the year, with individual investors also returning to the market in significant numbers.
Analysts are now speculating on the timing and extent of future rate hikes by Japan's central bank. Some predict further increases by October, which could shift investor focus towards domestically reliant companies less sensitive to rate changes. Meanwhile, Evarich Asset Management is looking to increase its investments in sectors like banking and construction following the end of negative rates.
Despite these optimistic trends, some caution that Japan's conservative spending habits and the central bank's commitment to low interest rates may limit the impact of wage increases on domestic demand. Nevertheless, Fitch Ratings suggests that Japan's strong corporate and household balance sheets, along with government financing flexibility, could mitigate any negative effects of tighter monetary policy.
