How Does Investment Change When Interest Rates Rise? — A Mindset for Turning "Scary News" into "Signs of Opportunity"

Thank you for always reading. This is Andy.

The other day, the Bank of Japan decided at its Monetary Policy Meeting to keep the policy interest rate at approximately 0.5%.
Additional rate hikes were put on hold. This demonstrates a stance of "carefully observing economic trends without rushing to raise interest rates."}], 0.5%.

With the yen weakening and inflation continuing, some people might have felt a sense of relief upon hearing this news about "keeping rates steady."
However, at the same time, many people are likely wondering, "How does interest rate policy actually affect my life?"

Today, I would like to consider how a 1% change in interest rates impacts investments.

1. Rising interest rates = The "value of time" returns to money

In the long-standing era of ultra-low interest rates, the environment was one where the disadvantages of holding cash were prominent environment.
However, when interest rates rise, "time returns" are generated once again for deposits and bonds.
In other words, this is the "resurgence of safe assets," where you can earn a steady return without taking risks.

2. Stocks are "discounted by interest rates" — but that is merely a "price adjustment"

Stock prices fall when interest rates rise because future earnings are discounted more strictly because of this.
Rather than "corporate value decreasing," this means the "price tag of growth" is becoming more realistic.

Especially in the case of Japanese stocks,
・Companies centered on domestic demand that do not rely on external financing
・Companies with strong financial foundations and high cash reserves
are more resilient to interest rate hikes and are more likely to become the stars of a selective market.

3. Portfolios shift from "defense" to "rotation"

In a rising interest rate environment, the correlation between assets weakens.
Since the relationships between stocks, bonds, gold, and cash "diverge,"
diversified investment demonstrates its true power.

• Slightly reduce the ratio of stocks and increase short-term bonds and cash

• Ensure liquidity by separating fixed deposits into "short-term and medium-term"

• Mix in a small amount of inflation-hedging assets like gold or foreign currency

This "rotational" portfolio functions best in an environment where interest rates are rising.

4. "Rising interest rates" are not "risk," but a "chance for re-evaluation"

When interest rates rise, it certainly places a heavy burden on household finances.
But on the other hand,
・Interest is paid on deposits
・Bonds regain their appeal
・The stock market selects the "real deal"
—that is the cycle of re-evaluation that begins.

Interest rates are not an "enemy," but a "ruler to measure time correctly."
For those who make that ruler their ally, the quality of their assets will begin to change.

Conclusion: 'Do not fear interest rates, design them to be your ally'

A period of rising interest rates is the perfect opportunity to return to the basics of investing.
Instead of reducing risk, realign risk correctly.
Rather than being chased by numbers, stand on the side that can read them.
That is where the quiet strength of a long-term investor lies.

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I have also written the following article from the perspective of a 1% interest rate, so please take a look if you like.