The “1.25% Interest Rate Era” Has Begun in Earnest: How Will the Outlook for Japanese Stocks Change?

Hello, this is TechAlpha.

Last week, on September 18th, the Bank of Japan raised its policy interest rate to 1.25%.

Since the negative interest rate policy was lifted in March 2024, this is the fourth rate hike.

Furthermore, there is speculation in the market that there will be “one more hike this year and several more next year,” with some views suggesting the terminal rate could be around 2%.

Organizing “Stocks That Lose When Interest Rates Rise”

First, let’s organize the stocks that tend to face headwinds from rising interest rates.

The most susceptible are “growth stocks” such as AI, semiconductors, and software.

Since these are “stocks bought in anticipation of high future profits,” the higher the interest rate, the smaller the calculated “present value” of those future profits becomes.

The reason Advantest, Tokyo Electron, and SoftBank Group were sold off heavily during last month’s interest rate hike phase is precisely for this reason.

Also, real estate stocks and companies with high debt levels tend to face headwinds because repayment costs increase as interest rates rise.

• Growth stocks like AI, semiconductors, and software are susceptible to headwinds from rising interest rates

• Advantest, Tokyo Electron, etc., are particularly sensitive

• Companies with high debt and real estate stocks also face headwinds

Organizing “Stocks That Benefit When Interest Rates Rise”

Conversely, there are also stocks that benefit from rising interest rates.

The most obvious are bank stocks.
As interest rates rise, the “spread between lending rates and funding costs” widens,
making it easier for the earnings of major banks like Mitsubishi UFJ and Sumitomo Mitsui Financial Group to improve.

Even in last month’s market, there were days when bank stocks remained resilient while the Nikkei Stock Average was falling.

Insurance stocks are similar, as they benefit from improved investment yields.

Trading companies and resource stocks tend to see improved earnings during “inflationary phases” that often occur alongside interest rate hikes, and the five major trading companies that Berkshire Hathaway has announced it will hold long-term are often discussed in this context.

• Bank stocks (Mitsubishi UFJ, Sumitomo Mitsui FG, etc.) benefit from improved spreads

• Insurance stocks are likely to benefit from improved investment yields

• Trading companies and resource stocks can easily expect earnings improvements during inflationary periods

The idea of ‘holding both’

In fact, during periods of rising interest rates, a sector rotation of ‘selling growth stocks and buying value stocks’ tends to occur.

However, as an individual investor, it is quite difficult to predict in the short term ‘which one is the correct choice’…

Looking back at last month’s market, just when you thought ‘AI is being sold off and power stocks are rising,’ semiconductors would surge the next day; it didn’t really move in one direction…

As one way of thinking,
the idea of diversification—’holding both stocks that are advantageous even when interest rates rise (banks, trading companies) and stocks that believe in AI growth (semiconductors, etc.)’—
might be a useful reference in the current market environment.

• In a rising interest rate environment, ‘selling growth and buying value’ is likely to occur

• However, it is difficult to predict which will win in the short term

• The idea of diversification—’holding both value and growth types’—might be effective in the current situation

Conclusion

The figure of ‘1.25% interest rate’ was an ‘unthinkable level’ until a little while ago.

Now, the Japanese financial environment has changed so much that there is talk of ‘another hike within the year’.

I feel that having a perspective on ‘which stocks are advantageous’ to respond to this change is becoming more important than ever.

Let’s keep watching together next week after the Silver Week holiday.

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