Japan 10-Year Bond Yield Hits Highest Level Since 2008: ETFs in Focus

Japan’s benchmark 10-year government bond yield surged to 1.575% on March 10, 2025, marking its highest level since 2008. This increase came after base pay data revealed the fastest wage growth in over three decades, reinforcing expectations of gradual interest rate hikes by the Bank of Japan (BOJ).

The Japanese central bank ended a decade-long, massive monetary stimulus last year and hiked short-term interest rates to 0.5% from 0.25% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation target.

Japan's annual wholesale inflation hit 4.0% in February due to rising raw material costs, keeping market expectations of a near-term interest rate hike by the BoJ alive.

BOJ’s Policy Path and Market Predictions

Despite speculation that BOJ officials may keep rates unchanged at their upcoming May 1 meeting, overnight index swaps indicate an 85% probability of a rate hike by July and near certainty by September, per Bloomberg, as quoted on Yahoo Finance.

Revised Forecasts and Investor Expectations

JPMorgan Chase & Co. has raised its year-end forecast for the 10-year Japanese government bond (JGB) yield from 1.55% to 1.7%. Some investors predict the yield could climb as high as 2%, per Bloomberg, as quoted on Yahoo Finance.

“There’s already some expectations that the BOJ may raise rates earlier than expected, and people are starting to think that the policy decision in May will not be smooth-sailing,” said Takashi Fujiwara, head of fixed income at Resona Asset Management, as quoted on Bloomberg.

Impact on ETFs

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. The ETF is up 8.2% so far this year (as of Mar. 7, 2025).

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, having gained 6.4% and 6.8% this year (as of Mar. 7, 2025), respectively.

However, before investing in small caps, investors should track the real wage hike momentum. Japan's real wages declined in January after two months of modest gains, according to data released on March 10, 2025. This comes just days ahead of the annual spring pay negotiations at the country's major firms.

Investors should note that regular pay saw its biggest increase in more than 30 years and overtime wages also rose, boosting nominal earnings. But real wages fell due to inflation reaching a two-year high. Investors should also note that if nominal wage hikes can beat inflation ahead (a scenario that will offer households purchasing power and companies can continue to pass on increased costs to consumers), small-cap Japan investing would be beneficial.

Japan Currency ETF to Gain

Any kind of monetary policy tightening is likely to benefit Invesco CurrencyShares Japanese Yen Trust FXY. The national currency, Japanese Yen, is also the currency of the accounts of the Bank of Japan.

Un-Hedged Japan ETFs Should Be in Sweet Spot

Despite a recent rally, Japan ETFs are still cheap. Hence, we do not expect any rate hike to weigh on Japan ETFs. Instead, as BoJ hikes rates and the yen is likely to strengthen, investors may play non-currency-hedged Japan ETFs like iShares MSCI Japan ETF EWJ, JPMorgan BetaBuilders Japan ETF BBJP and Franklin FTSE Japan ETF FLJP .

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This article originally published on Zacks Investment Research (zacks.com).

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