2 UK stocks to buy as Japan set to raise rates!

I’m looking at two UK stocks that could improve if Japan’s central bank raises interest rates.

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

Now, with inflation reaching 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 the economy.

The land of the rising sun – and rates!

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

If it rises by 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 result in a rise relative to the dollar. That’s because higher interest rates make people more attracted to invest in a country. The demand for the currency in the exchange market then increases as a result.

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

Turn Japan around

Baillie Gifford Japan Trust (LSE:BGFD), a constituent of FTSE 250invests in a list of 40 to 70 medium to small sized companies in East Asian countries.

While the fund sells at a 10% discount to net asset value, it unfortunately charges a fee of 0.88%. That’s higher than the generally accepted range of 0.5% to 0.75% for actively managed funds.

Regardless, I want to buy the stock because a stronger yen will increase the purchasing power in the pockets of Japanese consumers. In addition, Japanese companies that earn profits in yen will increase their value in other currencies.

Of course, not everyone in Japan will benefit from a stronger yen. Rich exporter Sony and Canon may have to increase prices in terms of foreign currency or see margins squeezed.

From Mount Fuji to Mount Debt

Japan’s government debt is the highest proportion of GDP in the world. That raises an important question. Can the BoJ raise interest rates, because of what it will do to the repayment of the national debt?

Every one percent increase in interest rates will increase debt service by 3.7 trillion yen (£23bn) for the 2025/2026 fiscal year, according to the Finance Ministry.

	General government gross debt as % of GDP (2021)
Japan	262.5
Venezuela	240.5
Greece	199.4
Sudan	182
Eritrea	176.3

But since Japan’s inflation genie is out of the bottle, I think interest rate hikes are almost over.

I will position myself by buying shares in WisdomTree Long JPY Short USD and Baillie Gifford Japan Trust as soon as I have spare cash.