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Japan ETFs to Buy on Negative Interest Rates

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Finally, Bank of Japan (BoJ) has also followed the ECB’s suit by pushing interest rates on excess reserves in the negative territory. While the investing world was expecting further monetary easing from BoJ as the region’s growth picture is still dull and the inflationary environment is slackening substantially, hardly did any one hope for the launch of a negative interest rate.

However, dissimilar to the single negative rate applied by the ECB, the Japanese central bank resorted to tiered measures exercised by the Swiss National Bank. Under this method, “the outstanding balance of each financial institution's current account at the BoJ will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.”

At its January-end meeting, BoJ set its benchmark interest rate at negative 0.1%; higher than ECB’s deposit rate of negative 0.3%. However, BoJ hinted at further cuts in interest rates if the economy fails to improve desirably.  

Prior to this, in December 2015, Japan’s central bank announced a number of cautious changes without expanding the volume of its annual asset purchasing program it has been following for about last three years. The bank opted for raising the Japanese government bonds’ (JGBs) average maturity from 7–10 years to 7–12 years.
The bank also revealed its plan of purchasing all JGBs to be issued in 2016 and announced that it will allocate 300 billion yen of assets annually in purchasing ETFs that seek to follow the JPX-Nikkei Index 400 (read: Yen ETF Gains on Bank of Japan Stimulus Changes).

Reason Behind This Dovishness

Investors should note that massive monetary easing to move closer to the target inflation rate of 2%, a flexible fiscal policy and structural reforms made Japan a rising star in 2013. However, the economy started to lose ground since 2014, slipping into recession in Q2 and Q3. Though BoJ reacted to this slowdown by enhancing its asset buying program to 80 trillion yen a year from the previous rate of 60–70 trillion yen in late October 2014, the response was not favorable.

Experiencing a spurt in the first quarter of 2015, the Japanese economy shrank in Q2 and barely escaped a technical recession in Q3 (having expanded 0.3% q/q in Q3 compared with an initial reading of a 0.2% contraction). Meanwhile, consumer prices in Japan increased 0.2% y/y in December 2015, down from 0.3% growth in the previous month.

The recent inflation trend shows that the level is far behind the BoJ’s goal of 2%. The central bank, on January 28, stretched out its timeline to attain the inflation goal to the first half of 2017, the third deferment in less than a year.

Market Impact

While this flush of liquidity gave the equities a solid boost, the Japanese yen fell against the U.S. dollar. This is truer given the Fed’s policy tightening stance and the resultant ascent of the U.S. dollar. CurrencyShares Japanese Yen ETF (FXY) lost 2.2% in the last five trading sessions (as of January 29, 2016). This proved vital for investors seeking a Japanese flavor in their portfolio, yet looking to hedge against a falling currency (read: Guide to Currency Hedging ETFs).

The move also lowered Japanese government bond yields boosting the Japanese government bond ETFs. DB 3x Japanese Govt Bond Futures ETN (JGBT) – a triple leverage JGB ETFs – added 2.4% on January 29 and hit a 52-week high.

Below we highlight a number of top-ranked (Zacks ETF Rank #2 (Buy) currency-hedged Japan ETFs which are likely to soar in 2016 given the supportive BoJ (see: all Developed Asia-Pacific ETFs here).

WisdomTree Japan Hedged SmallCap Equity Fund (DXJS)

DXJS offers exposure to the Japanese small cap stocks while at the same time provides hedge against any fall in the Japanese yen. Since small-cap stocks better reflect the economy’s inherent strength, this ETF appears to be a strong bet in the current perspective. This is truer given the global growth worries which weighed on the Japan’s export sector. The ETF charges 58 bps in fees and gained 6.6% in the last five trading sessions (as of January 29, 2016) (read: 4 Small-Cap ETFs for a Bumpy Japan Ride).
iShares Currency Hedged MSCI Japan ETF (HEWJ)

This is another currency hedged option to play the Japanese equity and is a hedged version of the popular fund (EWJ). Expense ratio comes in at 0.48%. The fund gained 5.9% in the last five trading sessions (as of January 29, 2016) (read: 11 Most Popular Currency Hedged ETFs).

Japan Hedged Dividend Growth Fund (JHDG)

The ETF follows the WisdomTree Japan Hedged Dividend Growth Index and measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index while at the same time neutralizing exposure to fluctuations between the yen and the U.S. dollar. JHDG charges 43 bps in fees and was up 6.3% in the last five trading sessions.
WisdomTree Japan Hedged Equity Fund (DXJ)
DXJ also looks to offer investors a way to gain exposure to the Japanese shares devoid of currency risks. This ultra-popular Japan ETF charges 48 bps in fees. The fund advanced 4.6% in the last five trading sessions (see DXJ vs. DBJP: Which is the Better Hedged Japan ETF?).
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