The Bank of Japan, perhaps the world’s second-most talked about central bank after the Federal Reserve, kicks off another two-day meeting Wednesday. Already in the midst of a massive quantitative easing program and with interest rates in real terms in negative territory, it is widely believed this BoJ meeting will be short on surprises.
Despite the central bank’s perceived lack of options with which to immediately weaken the yen and jolt Japanese stocks, BoJ meetings usually have a way of turning investors’ attention to ETFs such as the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the iShares MSCI Japan ETF (NYSEArca: EWJ).
Japan ETFs remain popular with investors. ETFs tracking the world’s third-largest economy hauled in another $2.02 billion in assets last month bring the year-to-date total to $28 billion, according to BlackRock data. Inflows to Japan ETFs account for the bulk of flows to non-U.S. developed market funds this year. [ETF Flows: July Was No June]
Year-to-date, DXJ and EWJ have brought in a combined $14.4 billion in assets, placing the funds second and third behind the SPDR S&P 500 (NYSEArca: SPY) in terms of 2013 inflows. However, DXJ and EWJ have waned in recent weeks as the yen once again gained some strength against the dollar. [Japan ETFs Jump Back Above Short-Term Trend Lines]
After performing well for first half of July, DXJ stumbled in the latter half of the month and now has a one-month loss of 1.7%. EWJ, which is not currency-hedged and therefore less vulnerable to a rising yen, is up 1.2% over the past 30 days.
Investors in both ETFs would likely cheer added stimulus efforts from BoJ, but they should not bet on that outcome. “The BOJ is widely expected to keep monetary policy steady by maintaining its pledge of increasing base money, or cash and deposits with the central bank, at an annual pace of 60 trillion to 70 trillion yen,” reports Stanley White for Reuters.
Recent USD/JPY price action indicates forex traders are not betting on significant surprises out of the BoJ meeting. Even the most rosy assessments are that BoJ either upgrades its outlook for the Japanese economy or announces a new, more rapid pace of asset-buying though not an all-out expansion of its easing efforts.
The bottom line is that any help BoJ can lend toward weakening the yen will be helpful for DXJ and EWJ, particularly the former, but betting on such an outcome this week may not present the best odds.
iShares MSCI Japan ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ and SPY.