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BoJ to Adopt a More Flexible Stance: ETFs in Focus

Sanghamitra Saha
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The latest meeting of Bank of Japan (BoJ) has been much-awaited as the central bank was supposedly looking for ways to tweak its yield curve control policy and stock-buying techniques. The news in fact drove the Japanese benchmark 10-year yield to about six-month high, sweeping U.S. and European bond yields upward as well in late July.

However, on Jul 31, BOJ kept its rates unchanged, maintaining its target for the 10-year government bond yield at around zero percent and the short-term interest rate target at minus 0.1%. The bank also maintained its policy to purchase JGBs at an annual pace of about 80 trillion yen to keep 10-year yields at its target (read: BoJ Mulling Over Policy Change: ETFs in Focus).

Investors should note that the BoJ had introduced a fresh set of changes to its ongoing policies in the September 2016 meeting. The key change then was that the bank would control the bond yield curve. It would issue a zero interest-rate target for 10-year government bonds to counter deflationary threats and accordingly buy bonds. Markets termed Japanese measures as QQEYCC.

Inside Small Tweaks in the Latest Meeting

In the latest July meeting, the bank mentioned that it would make its policy framework more flexible for the long-term yield target. It clarified that the yields may go up or down "to some extent mainly depending on developments in economic activity and prices," as quoted on CNBC.

Per Hiroaki Mutou, chief economist at Tokai Tokyo Research Institute, "it is a very mild policy change by the BOJ but its policy vector is heading towards tightening. The BOJ's message was to let long-term yields go higher," as quoted on CNBC. The economist views the move as a cue of policy tightening while not disrupting the market greatly.

The BoJ also noted that the economy would take "more time than expected" to attain the inflation target and so the bank “intends to maintain the current extremely low levels of short and long-term interest rates for an extended period of time.”

Since banks are complaining about eroding profitability on ultra-easy monetary policy, the BoJ announced that it would lower “the amount of reserve balances attracting negative rates from the average level of 10 trillion yen currently,” per businessinsider.com.

Market Impact

Following the meeting, yen dropped and the Nikkei scaled to green, per CNBC. Apparently, there were no major changes in the policy. Investors can target the likes ofWisdomTree Japan Hedged SmallCap Equity Fund DXJS, iShares Currency Hedged MSCI Japan ETF HEWJ, Xtrackers MSCI Japan Hedged Equity ETF DBJP andWisdomTree Japan Hedged Equity ETF DXJ. These funds have a Zacks Rank #2 (Buy) and have added in the range of 2.3% to 4.2% in the past month (as of Jul 30, 2018).

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WISDMTR-J HEF (DXJ): ETF Research Reports
 
ISHA-CH MS JAP (HEWJ): ETF Research Reports
 
DEUTS-XT MS JPN (DBJP): ETF Research Reports
 
WISDMTR-JP HSCF (DXJS): ETF Research Reports
 
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