Why ETF Investors Love Japan’s First Rate Hike in 17 Years

This week’s Federal Open Market Committee meeting isn’t the only gathering of central bankers that investors will be scrutinizing.  

Many eyes will also be on the Bank of Japan, which is expected to hike rates for the first time in 17 years on Tuesday.  

In fact, by the time you read this note, the BoJ will have made its rate decision overnight, and assuming the consensus is right, a new era for monetary policy in Japan will have begun.  

What does that mean for Japan exchange-traded funds, many of which have soared this year? Probably nothing, in and of itself. 

The Bank of Japan’s rate hike has been well orchestrated. Whether it happened this week, next month or later this year—investors knew it was coming.  

More important is what the rate hike indicates: normalization. 

Japan’s economy has been mired in a deflationary quagmire for close to three decades. It’s what prompted the country’s central bank to unleash some of the boldest, most aggressive monetary policies the developed world has ever seen.  

If that era of ultra-loose monetary policy is over, that could be good news—as long as Japan’s economy is turning the page on its deflationary doldrums.  

Judging by the performance of Japanese stocks, investors seem to think that’s the case. 

Nikkei Index, Japan ETFs Soar

Earlier this month, the Nikkei 225 stock index hit a record high for the first time since 1989; and U.S.-listed ETFs that hold Japanese stocks, like the $16.5 billion iShares MSCI Japan ETF (EWJ), the JPMorgan BetaBuilders Japan ETF (BBJP) and the WisdomTree Japan Hedged Equity Fund (DXJ) have been on a tear. 

EWJ and BBJP are each up 10% year-to-date, while DXJ—which hedges currency movements—is up nearly 20%. 

Over the past year, the unhedged duo is up around 28% versus 61% for DXJ. 

In other words, rate hikes in Japan aren’t anything like rate hikes elsewhere. While investors in most other countries recoil at the thought of elevated inflation and rising interest rates, they are a welcome sight in Japan.