Yields on 10-year Japan government bonds touched a 30-year high last month. Now market participants are pondering the effects of those higher yields on stocks in the Land of the Rising Sun. That’s sure to direct attention to the Bank of Japan (BOJ) meeting later this month. The central bank could very well tighten borrowing costs at that meeting. That outcome wouldn’t necessarily be bad news for Japan stocks and ETFs such as the WisdomTree Japan Opportunities Fund (OPPJ). Some experts believe a rate hike could actually put a ceiling above 10-year yields.
Additionally, the recent rise of Japan 10-year bonds could be a response to wage growth, labor shortages and increased domestic demand. Wage growth and rising demand are relevant in assessing OPPJ. The ETF allocates about 10% of its portfolio to the two consumer sectors.
“In the short term, a BOJ interest rate hike—which could come as early as later this month—could actually ease the upward pressure on long-end yields. This is because tighter policy could nudge up short-term yields and help anchor inflation expectations, which may result in lower long-term yields and a flatter yield curve,” noted Amova Asset Management.
Japan Stock Market Leadership Could Widen
As Amova noted, the recent rally by Japan stocks arrived with strong contributions from the technology sector. That supports upside for OPPJ. The ETF devotes 16.72% of its weight to tech stocks, making that the fund’s second-largest sector exposure. It’s possible leadership will widen, and that, too, could benefit OPPJ.
“The Japanese equity market’s recent surge has been led by AI and semiconductor-related sectors,” according to Amova. “However, there could be increasing scope for the broader market to take part in the rally, particularly from sectors related to domestic demand as well as small- and mid-cap stocks, which may provide the market with downside support even if tech-related names are hit by volatility.”
Amova reassured investors concerned about potential adverse effects of a rate hike on ETFs such as OPPJ.
“Even with modest tightening, financial conditions remain broadly accommodative. In addition, the macro backdrop—characterised by steady wage growth—suggests that monetary policy normalisation could be viewed as a confirmation of the Japanese economy’s resilience rather than a negative factor,” the asset manager concluded.
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