Can Japan ETFs Soar Without Helicopter Money?

Pouring cold water on investors’ hopes, the Bank of Japan (BoJ) declared a modest dose of stimulus on July 29. Hopes of a fat measure of money stimulus from the BoJ in line with prime minister Shinzo Abe’s plans for generous public spending were dashed.

This time, the BoJ raised the annual purchase limit of exchange-traded stock funds from ¥3.3 trillion to ¥6 trillion ($57 billion) and doubled its US dollar lending scheme to $24 billion. However, it kept its buying limit for Japanese government bonds or key interest rates (negative 0.1%) intact.

The bank revved up the real GDP growth outlook for fiscal 2017 to 1.3% from 0.1%, but maintained its price outlook for fiscal 2017 and 2018.

Are BoJ & Abe Acting Different?

With this, the BoJ almost walked opposite to the Japanese prime minister’s plans for a huge economic stimulus amounting to 28 trillion yen or $265 billion. This measure even breezed past initial estimates of around 20 trillion yen. It will comprise 13 trillion yen in "fiscal measures.”

However, at this stage, it seems that the BoJ will wait on the sidelines and see if inflated fiscal measures can jazz up the anemic Japan economy and make meaningful contribution in driving inflation to the 2% target.

For the BoJ, waiting till September – when the size and structure of the fiscal package will be disclosed – makes more sense, going by an article published in Financial Times.

No Helicopter Money?

There were also talks about “helicopter money” being included in the package after a meeting between the former U.S. Federal Reserve Chairman Ben Bernanke and Shinzo Abe. Helicopter money is an ultimate form of monetary stimulus under which a central bank can even print a large amount of money to fund government expenses. However, the BoJ made it clear that there was “no need and no possibility” of such a move (read: Did Pokemon Go Mania Boost Japan ETFs?).

However, market watchers still wish for some sort of "helicopter money" as the BoJ’s monetary policy is scheduled to for a September review. Analysts believe that "the government could issue 50-year bonds, and if the BOJ makes a commitment to hold them for a very long time, that would be like helicopter money." Only time will tell whether any helicopter will take off or not.

Market View

Many analysts view the present BoJ move as the failure of negative rates to boost Japan's deflationary backdrop. Notably, consumer prices there fell 0.4% year over year in June 2016, representing the fourth consecutive month of decline. Banks have been suffering due to such rock-bottom interest rates. Many are of the opinion that the BoJ is running out of meaningful tools.

ETF Impact

While such a small measure of monetary easing was not sufficient to lift investors’ mood, it seems that investors paid more heed to Abe’s promise of rolling out a gigantic fiscal stimulus soon. Probably this is why several Japan ETFs have been in the green. Also, stocks and ETFs that perform well in a rising rate environment benefited from the BoJ move. For example, WisdomTree Japan Hedged Financials Fund DXJF added about 3.64% on July 29 (read: Why Japan ETFs Are on an Incredible Run).

Among the other winners were Deutsche Trackers Japan JPX-Nikkei 400 Hedged Equity ETF JPNH, iShares JPX-Nikkei 400 ETF JPXN, WisdomTree Japan SmallCap Dividend Fund DFJ and iShares MSCI Japan Minimum Volatility ETF JPMV which added about 3.26%, 2.34%, 2.28% and 2.16%, respectively on July 29, 2016.

On the other hand, much lesser-than-expected monetary stimulus led Japanese currency yen to gain strength after the BoJ meeting. On July 29, CurrencyShares Japanese Yen ETF (NYSE:FXY) FXY, which tracks the value of the yen against the price of the greenback, added about 3.3%. The fund lost just 0.02% after hours (read: Best Performing Currency ETFs of 1H16).

Having said this, a few currency-hedged Japan ETFs lost considerably on the day. These were PowerShares Japan Currency Hedged Low Volatility Portfolio ETF FXJP,WisdomTree Japan Hedged Real Estate Fund DXJR,WisdomTree Japan Hedged Quality Dividend Growth Fund JHDG and WisdomTree Japan Hedged Equity Fund DXJ) that lost about3.4%, 2.85%, 2.11% and 1.38%, respectively.