How A Rate Hike By Bank Of Japan Will Affect Me

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Recently the idea by Bank of Japan to follow the rest of the world's central banks to raise interest rate for the very first time since 2015 has rattled the markets quite a bit, most notably on the forex rate. 

With the December meeting by the Bank of Japan coming up next week on the 18th and 19th of December, investors are betting currently on a 45% chance that Bank of Japan will raise the interest rates this month as of 8th December.  This caused the Japanese Yen (JPY) has strengthened by 4.4% against the USD in the past month, and up 3.1% against the SGD.   

So how will this news affect me and my finances directly or indirectly?  Do not get me wrong, I am not any big shot or savvy trader who does carry trade by borrowing JPY and invest in USD or SGD to earn the difference in interest rates and the strength of the currency pair.  The main concern I have is with my investment in ParkwayLife REIT.

It is no secret that ParkwayLife REIT has a natural hedge against JPY with majority of its loans denominated in JPY.  As such, any increase in interest rates will inevitable increase the REIT's borrowing cost as well.  However, as ParkwayLife REIT also derive a significant portion of its income in JPY from the nursing homes in Japan, this may help to mitigate any increase in borrowing costs down the road, provided that the strength of the JPY appreciates in a meaningful way.  Personally I am no forex expert, and I do not fully understand how the potential rise in interest rates and the strength of the JPY will work out, whether it is favorable or non-favorable towards the REIT.  For now, I can put my faith in the management, and continue to observe how the REIT's finances will work out in future quarterly reports.

On the other hand, how this event affects me directly is due to my plan to travel to Japan next year.  This is the first time I am travelling to Japan with my mum.  The strengthening of the JPY against SGD makes me wonder if I have already missed the chance to exchange the currency to JPY at the best rate, or would the boat return in the event that Bank of Japan decides not to increase the rate this month.  Frankly speaking, I know that I should not be too bothered by the small difference, because I am not changing hundreds of thousands of SGD to JPY.  The small amount needed for such travels does not have much impact, and on the longer term view, an exchange rate above SGD 1 : JPY 105 should be good.  Nonetheless, the current forex rates between SGD and JPY makes Japan an attractive destination for travel, especially for first timers like me who has heard much about the high costs associated with holidaying in Japan.  

Overall, I believe any rate hikes by Bank of Japan will have a widespread effect on the worldwide financial markets due to the large number of fund managers and firms performing carry trade on their portfolios.  The impact is something a noob like me will not understand thoroughly.  However it is also to be noted that similar to US, Japan has a huge national debt.  Any massive rise in interest rates, besides creating havoc in the financial markets worldwide, will also be a burden on their debt.  As such, any decision to raise interest rates by the Bank of Japan will be well thought out, and very gradual, as their inflation is nowhere near the disastrous levels faced by US in 2022.  In addition, with the FED appearing to have decided to pivot in 2024, that will help to mitigate and immediate need for Bank of Japan to raise interest rates.

For now, I shall continue to keep a close lookout on the exchange rate, and once it turns slightly more favorable, will exchange sufficient amount for the upcoming trip!  Barista FIRE, here I come...!

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