BoJ Ends Negative Rate Era: ETFs to Win

BoJ (Bank of Japan) hiked its short-term interest rates to around 0% to 0.1% from -0.1%, according to its statement at the end of its two-day March policy meeting. It marked the first rate-hike in 17 years, putting an end to the world’s only negative rates regime on signs of robust wage gains this year. Japan’s negative rates regime had been in place since 2016.

BoJ also abandoned yield-curve control policy, though it pledged to continue its purchases of Japanese government bonds with “broadly the same amount” as before – — currently about 6 trillion yen per month. It would resort to “nimble responses” in the form of increased JGB purchases and fixed-rate purchases of JGBs, among other things, if there is any sharp rise in long-term interest rates.

BOJ will now stop purchases of ETFs and Japan’s REITs. The bank also vowed to slowly reduce its purchases of commercial paper and corporate bonds, with the aim of stopping this practice in about a year.

However, no aggressive rate hikes are expected ahead as Japan’s central bank said that it “anticipates that accommodative financial conditions will be maintained for the time being,” given the modest growth picture in the world’s fourth-largest economy.

Japan’s Inflation Rising

Japan’s benchmark inflation topped expectations in January, which pointed toward likely adjustments to the central bank's monetary policy. Japan’s consumer prices, excluding fresh food, rose 2% from a year ago, aligning with the Bank of Japan's inflation target. The data exceeded a consensus estimate of 1.9%.

Last month, Marcel Thieliant at Capital Economics commented that “inflation will jump well above 2% in February as base effects from the launch of energy subsidies a year ago kick in, which would allow the Bank to tell a more compelling story that inflation remains strong,” as quoted on Reuters.

Notably, BoJ Governor Kazuo Ueda had repeatedly indicated that the outcome of this year’s annual “shunto” wage negotiations would be key to consistent price rises. The Bank of Japan expects higher salaries to lead to increased domestic demand boosting inflation.

ETFs in Focus

Japan Currency ETF to Gain

As the BoJ hikes rates, there are a few investing areas that could gain. First, any kind of monetary policy tightening is likely to benefit Invesco CurrencyShares Japanese Yen Trust FXY. The Japanese Yen is the national currency of Japan and the currency of the accounts of the Bank of Japan, the Japanese central bank. The fund is off 12% past year, which means that it is available at a cheaper valuation. The fund is up 0.6% past month.

Un-Hedged Japan ETFs Should Be in Sweet Spot

Despite a recent rally, Japan ETFs are still cheap. Hence, we do not expect any rate hike to weigh on Japan ETFs. Rather, as BoJ hikes rates and the yen is likely to strengthen, investors may play non-currency-hedged Japan ETFs like iShares MSCI Japan ETF EWJ, JPMorgan BetaBuilders Japan ETF BBJP and Franklin FTSE Japan ETF FLJP.

Value ETFs to Gain

If rates rise, value ETFs fare better than growth stocks. Hence, investors can tap iShares MSCI Japan Value ETF EWJV.

Will Small-Cap ETFs Fare Better?

In the face of a likely stronger yen, small-cap Japan stocks should do better than export-oriented, large-cap stocks. iShares MSCI Japan Small Cap ETF SCJ and WisdomTree Japan SmallCap Dividend Fund DFJ should thus be closely watched. However, before investing in small caps, investors should track the wage hike momentum. If wage hikes beat inflation (which will offer households purchasing power and companies can continue to pass on increased costs to consumers), small-cap Japan investing would be gainful.

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Invesco CurrencyShares Japanese Yen Trust (FXY): ETF Research Reports

iShares MSCI Japan ETF (EWJ): ETF Research Reports

WisdomTree Japan SmallCap Dividend ETF (DFJ): ETF Research Reports

iShares MSCI Japan Small-Cap ETF (SCJ): ETF Research Reports

Franklin FTSE Japan ETF (FLJP): ETF Research Reports

JPMorgan BetaBuilders Japan ETF (BBJP): ETF Research Reports

iShares MSCI Japan Value ETF (EWJV): ETF Research Reports

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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