Next month, the Bank of Japan (BoJ) will change its governor. Japan has had 20 years of zero interest rates.

Now, with inflation hitting a four-decade high of 4.2%, the BoJ could follow the Federal Reserve, the Bank of England and the ECB in hiking rates to cool off the economy.

Land of the rising sun – and rates!

The first stock I’d buy to try and get on the right side of this potential macro-trend is WisdomTree Long JPY Short USD (LSE:LJPY).

If the yen rises 10% relative to the US dollar, the price of this Exchange-Traded Product (ETP) will also rise by 10%, excluding fees.

All else being equal, a BoJ rate hike should cause the yen to rise relative to the dollar. That’s because higher interest rates cause people to be more attracted to investing in a country. Demand for its currency on exchange markets is then boosted as a result.

Consider that, converting from yen into dollars, it costs $2.83 to buy a Big Mac in Japan. That puts Japan at number 65 on the Big Mac Index, behind even developing countries like Argentina, Poland and Vietnam, where the cost of living is supposed to be lower. That suggests Japan’s currency has been artificially supressed relative to the dollar by the BoJ’s aggressive policies over the last two decades.

Turning Japanese

Baillie Gifford Japan Trust (LSE:BGFD), a constituent of the FTSE 250, invests in a hand-picked list of 40 to 70 medium- to smaller-sized companies in the East Asian nation.

While the fund is trading at a hefty 10% discount to net asset value, it unfortunately charges ongoing costs of 0.88%. That is substantially above the generally accepted range of 0.5% to 0.75% for actively managed funds.

Regardless, I’m interested in buying shares because a stronger yen would put more purchasing power in Japanese consumers’ pockets. In addition, Japanese companies earning profits in yen would see their valuations increase in terms of other currencies.   

Of course, not everyone in Japan would benefit from a stronger yen. Exporters like Sony and Canon might have to increase prices in terms of foreign currencies or see their margins squeezed.

From Mount Fuji to Mount Debt

Japan’s government debt as a proportion of GDP is the highest in the world. That raises an important question. Can the BoJ actually raise interest rates, given what this would do to the state’s debt repayments?

Every one-percentage-point rise in interest rates would boost debt service by 3.7 trillion yen (£23bn) for the 2025/2026 fiscal year, according to the Ministry of Finance.

But given the Japanese inflation genie is already out of the bottle, I think interest-rate hikes are almost a done deal.

I’ll be positioning myself by buying shares in WisdomTree Long JPY Short USD and Baillie Gifford Japan Trust as soon as I have some spare cash.

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