The Rise Of ETFs In Japan: How Investors Can Gain From Bond Yield Surge

Japan's financial markets are witnessing a shift as the country's benchmark 10-year government bond yield climbed to 1.575% on Monday, the highest level since 2008. This sharp rise follows data showing the fastest wage growth in more than three decades, strengthening expectations of further interest rate hikes by the Bank of Japan (BOJ).

With higher interest rates on the horizon, investors are evaluating Japan-focused ETFs to capitalize on these market shifts. Here are some key ETFs to watch:

iShares MSCI Japan Value ETF EWJV

Generally, value stocks thrive better in a rising interest rates environment than growth stocks. In this scenario, investing in iShares MSCI Japan Value ETF could bode well. The ETF has gained 7.08% this year thus far. Value stocks tend to perform well in a high-rate environment as they are less reliant on borrowing and hence have stronger balance sheets.

Also Read: Rising Inflation In Japan: 3 ETFs To Watch As BOJ Navigates Rate Hike Expectations

iShares MSCI Japan Small Cap ETF SCJ

A likely moderately stronger yen could be favorable for small-cap Japanese stocks, which are less reliant on exports compared to large-cap firms. An ETF to watch in this space is iShares MSCI Japan Small Cap ETF, which is up 5.77% year-to-date.

However, before choosing small-cap investments, investors should closely follow Japan's real wage hike momentum. While regular pay has seen its biggest increase in more than 30 years, Reuters reported that real wages fell in January due to inflation reaching a two-year high. If nominal wage growth beats inflation in the coming months, small-cap stocks could gain from stronger domestic purchasing power.

Invesco CurrencyShares Japanese Yen Trust FXY

Any monetary policy tightening by the BOJ, which is a high probability now, is likely to strengthen the Japanese yen. This is where the Invesco CurrencyShares Japanese Yen Trust could prove to be a wise investment, benefiting from a stronger yen as the central bank adjusts its policy stance. Incidentally, BOJ Governor Kazuo Ueda commented on the recent rises in bond yields, saying the market is factoring in expectations of future interest rate hikes, Reuters reported.

BOJ's Policy Path And Market Predictions

The BOJ put an end to its decade-long monetary stimulus in 2024 and raised short-term interest rates to 0.5% from 0.25% in January 2025. This decision stemmed from Japan's progress toward achieving a sustainable 2% inflation target.

According to Bloomberg, JPMorgan Chase & Co. has raised its year-end forecast for the 10-year Japanese government bond yield from 1.55% to 1.7%, with some investors predicting the yield could climb as high as 2%, quoted Yahoo Finance.

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