The Bank of Japan (BOJ) increased its policy rate by 25 basis points to 0.5% on Jan. 24, 2025, marking the highest level since 2008. This decision aligns with a CNBC survey conducted from Jan. 15-20, which revealed that most economists anticipated the hike as part of the central bank's efforts to normalize monetary policy.
Split Decision: One Dissenting Vote
The rate hike decision was not unanimous, with an 8-1 split among board members. Toyoaki Nakamura, the dissenting member, argued that any policy adjustment should wait until firms' earnings reports confirm a rise in earning power, expected before the next monetary policy meeting.
Officials Signal Commitment to Rate Hikes
Governor Kazuo Ueda and Deputy Governor Ryozo Himino have expressed the BOJ's readiness to raise rates further. Himino highlighted the importance of the upcoming "shunto" wage negotiations, expressing optimism for "strong wage hikes" in the 2025 fiscal year.
Analyst Predictions: Gradual Hikes Ahead
Vincent Chung, co-portfolio manager at T. Rowe Price, suggested in a note on Jan. 21 that the BOJ's rate hike may be the first of several gradual increases. He projected that the policy rate could reach 1% or higher by the year-end, aligning with the lower end of the BOJ's neutral rate range, as quoted on CNBC.
Yen Volatility and Currency Intervention
Despite significant yen volatility, analysts consider a large-scale currency intervention unlikely this year. In 2024, Japan spent 15.32 trillion yen ($97.06 billion) to stabilize the currency. Last July, the yen hit its weakest level against the dollar since 1986, at 161.96, prompting authorities to spend 5.53 trillion yen ($36.8 billion) on intervention.
Chung warned that rising U.S. inflation and sustained economic growth later this quarter could strengthen the dollar and weaken the yen. In this scenario, any kind of monetary policy tightening is likely to benefit Invesco CurrencyShares Japanese Yen Trust FXY.
Vincent Chung of T. Rowe Price concluded that USD/JPY realized volatility is likely to remain elevated in 2025, reflecting broader economic uncertainties and potential policy changes.
Value ETFs to Gain?
If the rates rise in Japan, value-based exchange-traded funds (ETFs) are likely to fare better than growth stocks. Hence, investors can tap iShares MSCI Japan Value ETF EWJV.
Will Small-Cap ETFs Fare Better?
In the face of a likely moderately stronger yen, small-cap Japan stocks should do better than export-oriented, large-cap stocks. iShares MSCI Japan Small Cap ETF SCJ and WisdomTree Japan SmallCap Dividend Fund DFJ should thus be closely watched.
However, before investing in small caps, investors should track the wage hike momentum. If wage hikes beat inflation (which will offer households purchasing power and companies can continue to pass on increased costs to consumers), small-cap Japan investing would be gainful.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
