Japanese investors could shift from low-yielding bonds to dividend paying stocks as inflation expectations rise, potentially strengthening Japanese equities and related exchange traded funds.
“As the signals are becoming increasingly bearish for its bond market, the trigger for a potential re-rating of of Japan’s equity market may come from bond biased investors at home,” according to a Boost ETP research note. “In seeking equity income as a viable means to hedge against looming inflation risks, they should set in motion a redirection of domestic saving flows away from bonds and into equities.”
Inflation expectations for Japan now exceed the U.S., Boost ETP analysts said. Specifically, Long-term inflation expectations are 2.4%, or 0.4% higher than the U.S.
As inflation rises, a fixed-income investor’s real return diminishes. Japanese investors would have to earn an average annual return of at least 2.4% just to keep up with inflation.
However, Japanese bond yields are extremely low – Japanese investors plowed into bonds during the prolonged deflationary environment to maintain their wealth. Yields on benchmark 10-year Japanese Treasuries is hovering around 1.66%, compared to 10-year U.S. treasury yields at 2.61%.
Given the rising inflationary outlook, Japanese investors may be more motivated to shift into riskier assets and dividend-paying stocks as a new inflation hedge. [Stock ETFs Have More Room to Run in Low Inflationary Environment]
The WisdomTree Japan SmallCap Dividend Fund (NYSEArca: DFJ) is the only dividend-focused Japan stock ETF available. DFJ has a 2.21% 12-month yield. In comparison, average dividend yields in Japan hover around 1.9%, according to Boost ETP.
Investors interested in Japanese markets can also look at other broad Japan ETFs, including the iShares MSCI Japan ETF (NYSEArca: EWJ), WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP). DXJ and DBJP try to hedge the negative effects of a depreciating yen currency on the overall fund’s performance. EWJ has a 1.17% 12-month yield, DXJ has a 1.28% 12-month yield and DBJP has a 2.01% 12-month yield. [Japan ETFs Fly on Abenomics’ Third-Arrow]
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.