Asia Tea Time - Cup 49 ☕
This week I talk interest rates in Japan, how much we should save and invest, and Singapore potentially hosting the Commonwealth Games.
Macro in Asia
Japan ends negative interest rates and hikes rates for first time since 2007
In a landmark decision by the Bank of Japan (BoJ), Japan’s central bank raised its short-term interest rate to a range of 0-0.1%.
This was an increase from the -0.1% rate previously and was the central bank’s first interest rate hike since 2007.
Why it’s happening
- Inflation is back in Japan. While that’s normally seen as bad news in most places, Japan has been experiencing deflation for ages.
- Traditional economics (*yawn*) dictates that interest rates can be raised when the economy is strong and inflation is at a reasonable level – both of which are present right now in Japan.
Why it matters
- Well, Japan has had negative interest rates since 2016 so this is kinda a big deal for the world’s third-largest economy.
- It also means that monetary policy in Japan could be coming back to some sort of “normal” in that interest rates will be sustainably positive.
What’s next?
- It’s all about inflation in Japan! Watch those numbers because you’ll want to see both sustained core inflation and wage inflation to make sure prices keep rising.
Tim’s Take
- Japan has been the perennial land of deflation. For a lot of economists, deflation is actually more dangerous for an economy than inflation.
- But with the BoJ’s latest rate hike into positive territory, this looks like it’s beginning to change somewhat.
In the US, one of the biggest inflationary metrics that’s watched by the US Federal Reserve is American consumers’ medium-term expectations of inflation – a regular survey carried out by the NY Fed and an indication of how psychology can feed into the real economy.
We can see that with the deflationary mindset in Japan that has become entrenched over the past three decades or so. But that’s clearly now shifting as inflation returns post-pandemic.
Core inflation in Japan is now at 2.8%, as of February’s data, and big wage negotiations between unions and large employers in March are expected to yield significant (by Japan’s standards) salary hikes.
The reaction to this week’s rate hike was a weakening of the Japanese Yen and a rally in Japanese stocks.
That’s because large global investors who had borrowed in Yen (mainly because of low rates) are now shifting towards linking the currency to Japan’s actual economic data – that’s a good thing longer term.
- As for those of us invested in Japan in some way, this has been great for stock markets as the benchmark Topix Index in Japan finished the week up over 6%.
- While Japan’s economy still faces a host of challenges – from a rapidly-ageing population to a near-total lack of immigration – higher inflation and higher interest rates are something to cheer.
Tim’s money tip of the week
How much we should be putting towards saving and investing every month is always a question of contention.
But we can also implement some rough guidelines to see how we can better reach our financial goals over the longer term.
Of course, before we start investing, we should always have at least 6-12 months of expenses in CASH as our emergency fund, in case we lose our jobs or need it for an unforeseen bill.
Once that’s sorted, we can view investing and saving as two buckets. Investing is for your long-term financial goals (so anything longer than five years effectively).
Our savings bucket can be discretionary expenses we will likely spend that money on in the next one to five years, perhaps a wedding, house purchase or big holiday.
So, what are good percentages to think about? For investing, starting out by putting 10% of your monthly gross pay (so whatever your salary is before tax) towards investing is a good start. Over time, you can work towards an ideal goal of putting 20% of monthly gross pay towards investing.
As for savings, this should be in cash-like instruments that are basically risk-free. These would include T-bills, cash accounts or money market funds because you do NOT want to be losing that money!
As for the percentage you direct towards this, an ideal one would be 10% of your monthly gross pay.
Remember, focusing on being disciplined and having a plan with your savings and investing will ensure you’re more likely to reach those goals over the long term.
Story of the week
There’s been a lot of debate in Singapore about the feasibility, and potential benefits, of hosting the Commonwealth Games in the city state.
The Commonwealth Games, which is held every four years and involves countries that were part of the former British Commonwealth, will next be put on in 2026.
No doubt, if Singapore did host the Games, more infrastructure would need to be built. Whether the net effect would be positive is up for debate.
A lot of countries and cities that host these big sporting events usually have to deal with cost overruns and venues that don't get used post-the-event.
Weighing that up against the intangible benefit of increased visibility is always a near-impossible task.