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BoJ Mulling Over a Stimulus Exit: ETFs in Focus

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The Bank of Japan (BoJ) is looking for ways to gradually leave the super-easy monetary era, but noted that it’s still too early to disclose anything yet. A close eye on economic progress and movement in inflation will decide the timing. This is because the bank chief Kuroda has repeatedly said that current inflation is far from the BOJ’s target of 2%.

The Japanese economy has long been at the receiving end of the beneficial easy money policy, which has put the economy on the growth path. The central bank has promised to buy $80 trillion yen ($720 billion) worth of bonds annually. The BoJ has been practicing negative interest rates on excess reserves since January 2016.

Though Japanese inflation is yet to pick up meaningfully, an uptick in domestic demand and solid external demand are positives. The Japanese economy grew 0.4% sequentially in the fourth quarter of 2017, much stronger than the preliminary estimate of a 0.1% increase and after a 0.6% expansion in the preceding quarter. It marked the eighth successive quarter of economic growth (read: Japan ETFs to Buy as GDP Growth Revised Upward).

On a year-over-year basis, the economy grew 1.6%, way faster than the preliminary estimate of a 0.5% expansion and breezing past expectations of a 0.9% uptick in economic activity. The employment rate in Japan rose to 59.30% in February from 59.10% in January of 2018. Wages growth was 0.70% year over year in January 2018.

Inside the Steeper Japanese Bond Yield Curve

Investors should note that the BoJ also launched a measure to control the bond yield-curve in September 2016. With this, the bank pledged to keep the yield on the country’s 10-year government bond at zero percent. To accomplish the task, the BoJ promised to purchase the accurate amount of bonds. Notably, short-term rates at negative 0.1% and the 10-year bonds at zero already ensured a steeper yield curve (read: BoJ Stirs Stimulus: Japan ETFs to Win & Lose).

Japan’s 10-year government bond yields are in the positive territory. And if the BoJ manages to make an exit from its hefty stimulus program (thanks to a growing economy), yield curve may steepen further.

Likely ETF Winners

Bank stocks should benefit from this move. No more pushing of rates into the negative territory and a likely reverse QE would be a welcome relief for bank stocks. WisdomTree Japan Hedged Financials Fund should be a beneficiary of this move as bank stocks perform better with the steepening of the yield curve, which is going to be the case for the Japanese economy after BoJ’s exit from its massive stimulus program. DXJF was up 2.1% on Apr 3.

Guggenheim CurrencyShares Japanese Yen ETF (FXY - Free Report) should also gain strength if BoJ gradually leaves the easy money era.  Among the other winners, Japan ETFs are likely to gain ahead. These areiShares MSCI Japan ETF (EWJ - Free Report) (up more than 1.2% on Apr 3), iShares JPX-Nikkei 400 ETF (JPXN - Free Report) (up more than 0.7% on Apr 3) and iShares MSCI Japan Small-Cap ETF (SCJ - Free Report) (up more than 0.8%) are to name a few (see all Asia-Pacific (Developed) ETFs) here.

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