Japan’s stocks are back in the limelight following a two-month selloff. Its stock exchange Nikkei 225 has been the best-performing in Asia since late March, per Bloomberg. The Nikkei 225 Stock Average has advanced about 9% since March 23.
The market suffered a lot in the selloff in the late January to early February period but the yen’s weakness against the greenback helped it regain the shine. Net foreign buying became positive (worth 207 billion yen of cash equities) in April after three months of net selling.
Moreover, in its latest meeting, which was also the first of Governor Kuroda’s second term, the Bank of Japan (BOJ) put stress on the necessity of protracted monetary easing. The bank recently decided to cast aside the “fiscal 2019” target for attaining 2% inflation.
This happened for the first time since the massive bond purchase started in 2013. This is because the massive monetary easing for about five years was not enough to bring about robust growth in the economy and pump up inflation to the desired level.
So, the promise of the continuation of the easy money policy along with a subdued yen gave a boost to Japan’s equities (read: 4 Reasons Why You Should Look at Japan ETFs Now).
How Long Will the Rally Last?
Japan’s economy is forecast to have shrunk for the first time in two years in the first quarter of 2018 due to muted private consumption and softer export demand, per a Reuters poll. A negative growth number, even if it is meagre, would break eight consecutive quarters of growth — Japan’s lengthiest period of economic expansion, per the source.
The poll also revealed the core consumer price index (CPI), which considers oil products but eliminates volatile fresh food prices, increased 0.8% year over year in April, slightly lower than the 0.9% gains seen in March.
If this happens, BoJ is expected to remain all the more accommodative in the coming days. Many economists surveyed do not expect Kuroda to meet the price target before the end of his second term in 2023, per Bloomberg.
So, Japanese equities are likely to float higher as the country has an export-oriented economy and a weaker currency makes its exports more competitive (read: Kuroda Enters Second Term: Japan ETFs in Focus).
Any Threat Ahead?
A strong yen (if geopolitical crisis flares up) could prove to be a dampener in the wining story of Japan investing. Japan’s five-year economic recovery under Prime Minister Shinzo Abe revolved around a weak yen and the resultant gains in exports. So, a subdued yen is needed to push Japan’s stocks.
And one BoJ member noted that policy “normalization” is part of the course of monetary accommodation, per Bloomberg. It means the central bank will consider policy normalization or a liftoff at some point of time. This is especially true given the latest surge in oil prices which could put an upward pressure on inflation.
However, given the current economic situation, such moves appear far off. So, investors may dip their toe in Japan currency-hedged ETFs (as the U.S. dollar has been steady of late). Some of the best-performing ETFs in the past one month are iShares Adaptive Currency Hedged MSCI Japan ETF , iShares Currency Hedged JPX-Nikkei 400 ETF (HJPX - Free Report) , WisdomTree Japan Hedged Financials Fund and Franklin FTSE Japan Hedged ETF (FLJH - Free Report) . These funds returned in the range of 3.8% to 5.5% in the past four weeks (as of May 10, 2018).
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