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Japan’s Low Interest Rates: What Can You Do?
Aspire, Investments | 02 June 2015
By: Lim Si Jie
Articles (169) Profile

Near-to-zero interest rates started becoming the norm for the US since 2009 after Japan adopted it as a economic policy in the 1990s. However, it was still deemed impossible for interest rates to be negative. The impossible was made possible after the global financial crisis created an environment of low interest rates.

The developing countries that employed the near-to-zero interest rates are only beginning to realise the repercussions recently. It is ironic how it is a known fact that Japan suffered for its decisions for ultra-low interest rates, and yet countries like the US and even Europe are adopting it.

The last time yields on Japanese government bonds (JGBs) were above the two percent mark was in 1999, as can be seen in the graph above. Ever since, the yields hovered between one to two percent before entering negative territory this year. What does this mean for investors?

Source: Bank of Japan

Few of the key concerns with ultra-low interest rates include the defined-benefit pension schemes and banks carrying a large portion of government debt.

Shift Into Equities

Large amounts of this pension money are invested in Japanese government bonds but yields on Japanese government debt are currently extremely low. Therefore, the Government Pension Investment Fund (GPIF) of Japan is investing in equities instead.

However, it is hardly the only pension fund making such a transition. In March, three of Japan’s next biggest public pension funds announced a similar shift out of domestic government bonds into equities. This is one of the reasons why the Nikkei 225 is continuing to climb higher since a one-year low in October 2014.

Source: Government Pension Investment Fund (GPIF) of Japan

Reducing Japanese Banks From A Vulnerable Position

Banks in Japan are large holders of government debt. If bond prices fall, it could hurt capital ratios of banks, which could in turn affect their capacity to lend. This represents a massive amount of money that banks are vested in government bonds.

The Japanese government’s quantitative easing program (QE) aims to reduce the dependency of domestic financial institutions on Japanese government debt. This is a key part of the Bank of Japan’s (BOJ’s) QE program. By buying JGBs, the BOJ is hoping to improve the flow of funds in the economy.

Source: Bank of Japan

Bottom Line For Investors

As BOJ continues to preserve interest rates at ultra-low levels, major funds continue its shift into equities to buoy the Japanese stock market. Japanese equities offer an attractive option for investors to diversify their holdings. And while BOJ maintains its QE program, the market continues to be buoyant on Japanese bank equities as well.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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