The Coming Week in Asia: Early Signs on BOJ Rate Hike Encouraging

TOKYO -- When the temperature in Tokyo hit 95 degrees on Friday, traders had more than rising mercury to sweat about.

After months of hinting that Japan's economy is sturdy enough to handle higher interest rates, the Bank of Japan did something it hadn't done in a decade: It raised borrowing costs.

The higher rates have provoked heated discussion in Japan's trading and investing circles. On the one hand, they will undoubtedly raise concerns that at least some of the country's highly indebted companies will fail as they struggle to pay back loans. On the other, central bankers have demonstrated that their independence, won just a few years ago, was not a trifling issue, as many politicians had suggested.

The pessimists have a lot of firepower in their arsenal. Although short-term interest rates are now just 0.29%, the debt corporate Japan is shouldering would strain even Atlas. The zero-interest-rate policy the central bank had maintained, dubbed "artificial monetary policy" by critics, has prompted corporate debt to grow to about 200% of gross domestic product, according to estimates by Goldman Sachs. The cheap borrowing has propped up many shaky firms, some of which probably would have collapsed a long, long time ago.

The early news, however, is that the optimists have won. On Friday, the benchmark Nikkei put on a good show, rallying nearly 1% in the face of higher rates. The bulls say that's because bank governor Masaru Hayami had constantly telegraphed the coming hike since last year. Everyone knew it was coming.

Investors also are likely to cheer the bravado with which central bankers defied the government, which tried to dissuade the bank from raising rates. An independent central bank means (at least in theory) that decisions about monetary policy are made with the economy in mind, not the politics at hand.

The coming week may also provide good news on the company front. On Thursday, antivirus-software maker Trend Micro (TMIC) jumps from the over-the-counter market to the Tokyo Stock Exchange's first section. Listing on Japan's version of the Big Board will do wonders for the battered sector and will help sentiment among tech investors. Foreign investors, who own roughly 30% of its stock, had been pushing the firm to make the jump for a long time. Besides increasing Tokyo-based Trend Micro's celebrity, it'll boost liquidity, they say.

"Trend Micro's growth prospects over the medium term are stellar," says Iichiro Yamaguchi, analyst at Daiwa Institute of Research. "They're plugging away at capturing the Internet antivirus-software market, which is the next area of expansion. They also have captured much of the European market, expanding their reach."

Many U.S. mutual funds also own a stake in the company, including (ARPAX)Ark Funds Small-Cap Equity and (FDIVX)Fidelity Diversified International, according to bigdough.com. The former is up 93.3% over 12 months, while the latter is up 32.4%.

To be sure, the firm has hit some snags along the way, including a legal battle with rival Network Associates (NETA). But the case is settled and the firm expects a net profit of 1.9 billion yen ($17.5 million) for the fiscal year ending in December.

Trend Micro's president, Steve Chang, may be one of the few people who isn't sweating it out in Tokyo these days.

>To order reprints of this article, click here: Reprints