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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.
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 - 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 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 - 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 likely 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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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 - 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 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 - 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 likely 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.