The Japanese central bank seems determined to dole out anything to everything to bring its economy out of deflationary pressure after Prime Minister Shinzo Abe’s economic revival plan failed to sustain momentum.
While the U.S. Federal Reserve ended its policy of quantitative easing last week, the Bank of Japan (BOJ) surprised the markets by expanding its monetary stimulus policy, further pushing Japan’s economic policy in the opposite direction.
The Latest Policy Move
In a move to fight weakening growth conditions and arrest sliding consumer prices, Japan’s central bank said it would increase its asset buying program to 80 trillion yen a year, up from the previous rate of 60–70 trillion yen.
Apart from buying more Japanese government bonds, the BOJ said it would triple the pace at which it purchases stocks and property funds (REITs) to boost the sluggish economy. The Japan’s Government Pension Investment Fund (GPIF) – with an asset base of $1.1 trillion – announced that it will increase its allocation to Japanese and overseas equities to 25% each from the previous 12% allocation each. Also, it will reduce its allocation to domestic bonds to 35% from 60%, as per Wall Street Journal.
Abenomics Unpopularity
These measures are expected to spur investments and growth in the economy, which is currently struggling from a sales tax hike implemented in April and concerns that lower oil prices would affect consumer prices. April’s tax hike pushed Japan to its deepest slump during the second quarter since the 2009 global financial crisis.
The country’s economy shrank 7.1% annually in the second quarter raising fears over the viability of ‘’Abenomics” – a stimulus program introduced by the Prime Minister Shinzo Abe nearly two years ago to bring Japan out of the economic stagnation and deflation trap. The approach, which used three arrows, namely drastic monetary easing, flexible fiscal policy and structural reforms, has been losing momentum.
Also, private consumption, which makes up some 60% of Japan’s GDP, has been on a downward trajectory with the nation’s household spending falling more than expected in September. Moreover, annual core consumer inflation slipped to 1% in September – well below the central bank’s 2% target.
Given the dwindling pace of growth, the BOJ has slashed its GDP target for fiscal year ending next March to a meager 0.5% from the earlier forecast of 1% (read: 3 Excellent ETFs to Play the Dollar Surge).
Market Impact
Economists believe that the recent move would also enable Japan to withstand the negative effect from a second sales tax hike expected to be announced in December.
These aggressive stimulus measures provided the much needed encouragement to the Japanese markets, which broke out of its 12-month trading range following the announcement. The Nikkei Stock Index jumped nearly 5% with heavy volumes on the day the measures were announced – its highest level in nearly seven years. The Japanese yen plummeted to a near seven-year low on the announcement.
Play the Hedged Way
If the expansionary monetary policy by the BOJ indeed succeeds in fuelling growth in the ailing economy, Japanese stocks might have great days ahead and might even continue to climb higher. Also, the aggressive move by the government’s giant pension fund to increase its equity allocation is likely to provide further boost to the equity markets.
Moreover, a slumping currency could actually bode well for exports and help improve the region’s trade balances, given the fact that Japan is primarily an export oriented economy.
However, a weak currency would hurt total returns for U.S. investors, at least when repatriating back to dollars. For this reason, investors wanting to play the Japanese equity space, but wanting not to be let down by the yen, might be better off considering a hedged yen play.
For those keen on playing the space in a safe way, there are a handful of yen-hedged ETFs currently on the market, which could be excellent plays following the BOJ action. Below, we have highlighted two top-ranked ETFs in greater detail for those looking for a hedged Japanese ETF exposure.
WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ)
The fund is one of the largest and most popular ETFs in the Japan ETF space with an asset base of $10.3 billion and an average trading volume of 4.7 million shares a day.
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