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What Lies Ahead of Japan ETFs If BoJ Hikes Rates Soon?
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Japan’s benchmark inflation topped expectations in January, pointing 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%.
A significant contributor to the inflation surge was a 63% uptick in the price of foreign travel packages. The weakening yen attracted more tourists to Japan but also led to higher costs for Japanese travelers abroad.
Bond Yields Rise Amid Inflationary Pressure
Following the release of data, bond yields surged. The two-year note yield jumped to the highest level since 2011. This development points at growing speculation that the Bank of Japan (BOJ) may abandon its negative interest rate policy in the near future, leading to its first interest rate hike since 2007.
Kazuya Fujiwara, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, expects the BoJ to hike rates as early as in March, per a Bloomberg article. However, most of the analysts expect the first interest rate hike since 2007 by April.
BOJ's Confidence and Economic Indicators
BoJ Governor Kazuo Ueda expressed confidence in anchoring inflation above 2%. Despite challenges such as the recent economic downturn and sluggish wage growth, the BOJ remains optimistic about achieving its inflation targets.
Economic Challenges and Implications
While inflation has exceeded forecasts for 22 successive months, challenges remain. The recent economic downturn, coupled with sluggish wage growth and concerns about the weakening yen's impact on household consumption, present hurdles for sustained economic recovery.
February Inflation Reading to Hit Above 2%?
Economists and investors are closely monitoring upcoming inflation figures for February, which will provide insights into the trajectory of price growth after the initial impact of the government price relief measures fades. These figures will play a crucial role in shaping expectations of future BOJ policies and potential rate hikes.
Marcel Thieliant at Capital Economics believes 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.
ETFs in Focus
Japan Currency ETF to Gain
If the BoJ hikes rates soon, there are a few investing areas that could gain. First, a kind of monetary policy tightening is likely to benefit Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) . 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 10% past year, which means that it is available at a cheaper valuation.
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, if BoJ hikes rates and the yen strengthens, investors may play non-currency-hedged Japan ETFs like iShares MSCI Japan ETF (EWJ - Free Report) , JPMorgan BetaBuilders Japan ETF (BBJP - Free Report) and Franklin FTSE Japan ETF (FLJP - Free Report) .
Value ETFs to Gain
If rates rise, value ETFs fare better than growth stocks. Hence, investors can tap iShares MSCI Japan Value ETF (EWJV - Free Report) .
Will Small-Cap ETFs Fare Better?
In the face of a stronger yen, small-cap Japan stocks should do better than export-oriented, large-cap stocks. iShares MSCI Japan Small Cap ETF (SCJ - Free Report) and WisdomTree Japan SmallCap Dividend Fund (DFJ - Free Report) 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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What Lies Ahead of Japan ETFs If BoJ Hikes Rates Soon?
Japan’s benchmark inflation topped expectations in January, pointing 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%.
A significant contributor to the inflation surge was a 63% uptick in the price of foreign travel packages. The weakening yen attracted more tourists to Japan but also led to higher costs for Japanese travelers abroad.
Bond Yields Rise Amid Inflationary Pressure
Following the release of data, bond yields surged. The two-year note yield jumped to the highest level since 2011. This development points at growing speculation that the Bank of Japan (BOJ) may abandon its negative interest rate policy in the near future, leading to its first interest rate hike since 2007.
Kazuya Fujiwara, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, expects the BoJ to hike rates as early as in March, per a Bloomberg article. However, most of the analysts expect the first interest rate hike since 2007 by April.
BOJ's Confidence and Economic Indicators
BoJ Governor Kazuo Ueda expressed confidence in anchoring inflation above 2%. Despite challenges such as the recent economic downturn and sluggish wage growth, the BOJ remains optimistic about achieving its inflation targets.
Economic Challenges and Implications
While inflation has exceeded forecasts for 22 successive months, challenges remain. The recent economic downturn, coupled with sluggish wage growth and concerns about the weakening yen's impact on household consumption, present hurdles for sustained economic recovery.
February Inflation Reading to Hit Above 2%?
Economists and investors are closely monitoring upcoming inflation figures for February, which will provide insights into the trajectory of price growth after the initial impact of the government price relief measures fades. These figures will play a crucial role in shaping expectations of future BOJ policies and potential rate hikes.
Marcel Thieliant at Capital Economics believes 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.
ETFs in Focus
Japan Currency ETF to Gain
If the BoJ hikes rates soon, there are a few investing areas that could gain. First, a kind of monetary policy tightening is likely to benefit Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) . 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 10% past year, which means that it is available at a cheaper valuation.
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, if BoJ hikes rates and the yen strengthens, investors may play non-currency-hedged Japan ETFs like iShares MSCI Japan ETF (EWJ - Free Report) , JPMorgan BetaBuilders Japan ETF (BBJP - Free Report) and Franklin FTSE Japan ETF (FLJP - Free Report) .
Value ETFs to Gain
If rates rise, value ETFs fare better than growth stocks. Hence, investors can tap iShares MSCI Japan Value ETF (EWJV - Free Report) .
Will Small-Cap ETFs Fare Better?
In the face of a stronger yen, small-cap Japan stocks should do better than export-oriented, large-cap stocks. iShares MSCI Japan Small Cap ETF (SCJ - Free Report) and WisdomTree Japan SmallCap Dividend Fund (DFJ - Free Report) 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.