The Bank of Japan has carried out a second monetary tightening. After moving its key rate from -0.10% to the 0-0.10% range in March, it raised the cost of money to 0.25% on July 31, the highest level since 2008. It has also decided to halve its bond purchases by March 2026 gradually. In the long term, it will let the financial markets set the appropriate level of long-term interest rates.
On July 31, the Bank of Japan decided to end its extremely accommodative monetary policy of more than a decade. It believes that the Japanese economy has well and truly emerged from its torpor and that a virtuous circle has been established.
Wages are on the rise, a promising sign for the Japanese economy. This will make it possible to have a sustainable annual increase in prices in line with the 2% target after decades of very low inflation. The rise in wages will also boost domestic demand and allow GDP growth to be around 1% in the coming years.
Yen may become even stronger
The increase in the key rate has given new colour to the yen, which had fallen to an all-time low. Vastly undervalued, the Japanese currency has significant upside potential. As part of a properly diversified portfolio, buy a share of bonds in yen, regardless of your risk profile.
The Bank of Japan's action and the appreciation of the yen have logically penalised the Tokyo Stock Exchange by making Japanese shares less attractive to foreign speculators.
However, monetary normalisation and the rise of the yen, whose extreme weakness was a disadvantage rather than an asset for the Japanese economy, are a positive development. For the long term, the potential of Japanese stocks remains strong, making them a viable investment option.
Ultimately, to lessen instability and enhance your returns, ensure your portfolio is diversified and favor a long-term approach. See here our suggestion.