Skip to content

CONTRIBUTORS

Manraj Sekhon, CFA

Chief Investment Officer,
Templeton Global Investments

The Bank of Japan (BoJ) ended its negative interest rate policy (NIRP) and raised rates by 10 basis points to a range of 0.0%–0.1% on March 19, 2024. This decision signals policymakers’ confidence in their deflation fight. The prolonged period of low and negative interest rates in Japan has put downward pressure on the USD-JPY exchange rate. It also encouraged Japanese investors to buy higher yielding foreign assets and created the right environment for a carry trade—borrowing Japanese yen to invest in higher yielding currencies.

The impact of the policy change on the USD-JPY rate is likely to be gradual given that it was well telegraphed. Consensus expectations are for a slow rise in interest rates to 0.25% by the end of 2024.1 Higher interest rates and rising inflation expectations are positive for the Japanese equity market.

The extended period of low and negative interest rates has led to a significant increase in the carry trade. Over the past three years, Japanese yen loans to foreign investors have increased by US$460 billion to US$1.8 trillion.2 Conversely, yen weakness has increased the value of overseas investment income received by Japanese investors by US$233 billion to US$551 billion over the same period.3 Significant yen strength could reduce these flows, leading to increased volatility in global bond and equity markets.

The implications of the interest-rate increase for the Japanese equity market are positive. A return of modest inflation creates a tailwind for corporate earnings, potentially restarting the investment cycle. For households, the end of falling goods prices may release pent-up demand. Foreign investor flows are also an important market driver, as can be seen in the chart below.  

Exhibit 1: Foreigners Are the Marginal Drivers of the Japanese Equity Market

Fund Flows and the Nikkei 225 Index
As of March 19, 2024

Source: Ministry of Finance Japan. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

We are positive on Japanese banks, industrials and consumer discretionary companies. Banks are expected to see improved profitability as net interest margins and loan growth increase. Industrials may benefit from a revival in investment. Consumer discretionary companies are beneficiaries of rising wages and a return of pricing power.

While we acknowledge the positives, we are monitoring the downside risks associated with the end of NIRP. We are focusing on the USD-JPY exchange in case of a significant move lower. Such an event could lead to a sharp fall in the US Treasury market as Japanese investors repatriate their US bond market investments. International equity markets could also come under downward pressure if the unwinding of the carry trade leads to the sale of equities by Japanese investors.

Endnotes

  1. Source: Bloomberg, March 19, 2024.
  2. Source:  Ministry of Finance Japan. December 31, 2023. 
  3. Ibid.
     

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Active management does not ensure gains or protect against market declines.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. 

Copyright ©2025. Franklin Templeton. All rights reserved.

This document is intended to be of general interest only. This document should not be construed as individual investment advice or offer or solicitation to buy, sell or hold any shares of fund. The information provided for any individual security mentioned is not a sufficient basis upon which to make an investment decision. Investments involves risks. Value of investments may go up as well as down and past performance is not an indicator or a guarantee of future performance. The investment returns are calculated on NAV to NAV basis, taking into account of reinvestments and capital gain or loss. The investment returns are denominated in stated currency, which may be a foreign currency other than USD and HKD (“other foreign currency”). US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar / other foreign currency exchange rate. Please refer to the offering documents for further details, including the risk factors.

The data, comments, opinions, estimates and other information contained herein may be subject to change without notice. There is no guarantee that an investment product will meet its objective and any forecasts expressed will be realized. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where an investment product invests in emerging markets, the risks can be greater than in developed markets. Where an investment product invests in derivative instruments, this entails specific risks that may increase the risk profile of the investment product. Where an investment product invests in a specific sector or geographical area, the returns may be more volatile than a more diversified investment product. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this document or any comment, opinion or estimate herein. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any share class with “(Hedged)” in its name will attempt to hedge the currency risk between the base currency of the Fund and the currency of the share class, although there can be no guarantee that it will be successful in doing so. In some cases, investors may be subject to additional risks.

Please contact your financial advisor if you are in doubt of any information contained herein.

For UCITS funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the UCITS Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 93a of the UCITS Directive.

For AIFMD funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the AIFMD Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 32a of the AIFMD Directive.

For the avoidance of doubt, if you make a decision to invest, you will be buying units/shares in the fund(s)/ sub-fund(s) and will not be investing directly in the underlying assets of the fund(s)/ sub-fund(s).

This document is issued by Franklin Templeton Investments (Asia) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Unless stated otherwise, all information is as of the date stated above. Source: Franklin Templeton.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.