Why Have Active Japan-Focused Funds Done Better Than ETFs?
An unpleasant surprise
Haruhiko Kuroda, governor of the Bank of Japan, likes to give surprises. In his latest surprise on April 28, 2016, he left the monetary stance of the Bank of Japan unchanged. It was a time when several market participants were expecting the central bank to take further steps to stoke inflation in the economy.
This was Kuroda’s second surprise in 2016. In January, he surprised the markets by pushing a key interest rate into negative territory. Part of the cash that commercial banks used to park with the central bank had banks paying the Bank of Japan instead. This move was a surprise because earlier, Kuroda had been clear that interest rates would not be pushed into the red ink zone.
Repercussions of the move
Japanese stocks (DXJ) (HEWJ) (SCHF) were stunned by the non-move. This led to falling stock prices. Meanwhile, bond prices rose, and consequently, their yields fell. In fact, the ten-year bond yield fell to -0.12% in the days following the April 28 decision. This was just a hair away from the lowest ever yield on the bond.
At the same time, the Japanese yen strengthened after the policy announcement. Usually, domestic currency strengthens after tightening a monetary policy. But the strengthening of the yen without any tightening shows the extent of disappointment in the currency markets, which had priced in some move from the central bank. This also led to currency-hedged funds invested in Japan (DBJP) doing worse than their unhedged peers.
Did market participants overreact?
It seems that market participants may have overreacted. Trying to send signals to a central bank is nothing new. However, central banks are mandated to address their mandates rather than appease market participants. Although it’s true that inflation in Japan has refused to budge, it doesn’t mean that a central bank can go on providing a stimulus.
Monetary actions take time to have an effect. The decision to introduce negative rates was taken on January 29 and has been in effect since February 16. Central bankers may need to wait until their June meeting to see if the January move has had any impact.
In this series
In light of the performance of Japanese equities year-to-date in 2016, we’ll be looking in this series at how Japan-focused funds (FJSCX) (HJPSX) have fared. We’ll also see the reasons for their performances.
Let’s start our analysis with the Brown Advisory – WMC Japan Alpha Opportunities Fund (BIAJX).
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