Rate hike decided: From a “world with interest rates” to a “world where interest rates move.” How should investors think about Japanese Government Bonds for Individuals?

At its monetary policy meeting on 17–18 September, the Bank of Japan raised its policy rate to around 1.25%. The latest hike followed June’s, with one July meeting in between, but the interval between rate hikes may have shortened from the previous cycle. Further hikes may not continue at the same pace.

In interpreting the background, political considerations need to be distinguished from policy decisions based on economic conditions and prices. If, in a situation where the real policy rate remains low after taking inflation into account, higher crude oil and food prices spread to wages, selling prices and inflation expectations, this would provide a reason to adjust the degree of monetary easing.

Through this series of rate hikes, Japan’s economy is moving away from the era of ultralow interest rates that continued for many years. The effects are also beginning to reach the lending rates, deposit rates and mortgage rates faced by companies and households. While rising interest rates increase the burden on borrowers, they also create greater opportunities for households investing their funds to earn interest.

The shift suggests a need to consider asset building on the assumption of a world where interest rates move, including ways to hedge the risks of an upside surprise in inflation and rising interest rates. In long-term investing, attention should also be paid to the economic cycle, bearing in mind that interest rates will not continue rising forever and may eventually enter a period of decline.