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BoJ Mulling Over Policy Change: ETFs in Focus

Sanghamitra Saha
3M (MMM) provides long-term targets along with forecasts for 2019.

The Bank of Japan (BoJ) is reportedly looking for ways to tweak its yield curve control policy and stock-buying techniques, which could make its huge stimulus program more maintainable. The news pushed up the benchmark 10-year yield to the highest point in nearly six months and dragged down bond prices on Jul 23.

The 10-year yield rose about 10 bps, which is a huge rise in “a market that rarely moves more than 1 bp,” per ANZ analysts. The steep rate moves were initially triggered off by a news report by Jiji Press on Friday morning giving cues that BoJ could be adopting a more “flexible” approach on its yield curve control policy. Soon after, a Reuters article mentioned the bank’s possible policy shift at this month’s meeting. The reports raised hopes about the start of the BoJ’s policy normalization soon, per MarketWatch.

In its April meeting, the BoJ acknowledged the fact that prices have become relatively less dependent on monetary policy. As expected, the BOJ maintained short-term interest rates at minus 0.1% and the 10-year bond yield at around 0% (as part of its quantitative and qualitative monetary easing with yield curve control or QQEYCC) (read: Kuroda Enters Second Term: Japan ETFs in Focus).

Investors should note that the BoJ had launched 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.

Likely ETF Winners

Bank stocks should benefit from a steepening of the yield curve. WisdomTree Japan Hedged Financials Fund DXJF 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 if BoJ’s policy shift results in a steepening yield curve. DXJF was up 3.3% on Jul 23.

Invesco CurrencyShares Japanese Yen FXY, which added about 0.1% on Jul 23, should also gain strength.  Among the other winners, Japan ETFs are likely to gain ahead. These are WisdomTree Japan SmallCap Dividend ETF DFJ (up about 0.9% on Jul 23) and iShares MSCI Japan Small-Cap ETF SCJ (up about 0.6% on Jul 23) are to name a few (see all Asia-Pacific (Developed) ETFs) here.

What Lies Ahead?

Japanese inflation is yet to pick up meaningfully.Japan's year-over-year consumer price inflation was 0.7% in June 2018, same as that of previous month and below market consensus of 0.8%. Food inflation in June bottomed since a deflation last November.

The Japanese economy shrank 0.2% sequentially in the first quarter of 2018, following an upwardly revised 0.3% growth in the previous period. It marked the first contraction since the December quarter 2015.

Given such downbeat growth and inflation data, it would be tough for the BoJ to take an outright hawkish stance as early as this month. Still there's no smoke without fire, we can well expect some BoJ moves in the upcoming meeting. And with speculation being rife, investors are fast selling long-term bonds.

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CRYSHS-JAP YEN (FXY): ETF Research Reports
 
WISDMTR-JP HFF (DXJF): ETF Research Reports
 
WISDMTR-JP SC D (DFJ): ETF Research Reports
 
ISHARS-MS JA SC (SCJ): ETF Research Reports
 
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