Japan’s benchmark Nikkei 225 has extended its winning streak lately. Most Asia-Pacific markets have been on an uptrend, tracking Wall Street gains after U.S. inflation data boosted expectations of a Federal Reserve rate cut next month.
Analysts at Fitch Solutions noted that recent Japanese asset appreciation reflects positive policy steps targeted at improving corporate governance and opening markets to more foreign investment, as quoted on CNBC.
If the Liberal Democratic Party of Japan remains on its positive policy trajectory in terms of opening its domestic market to greater foreign investment and more foreign workers, “the effort to escape deflation” will continue to make headway, the research firm said, as quoted on CNBC.
Nikkei 225 is up about 10% so far this year, on par with SPDR S&P 500 ETF Trust SPY. However, WisdomTree Japan Hedged Equity Fund DXJ has advanced about 13% this year, and iShares MSCI Japan ETF EWJ has gained about 18%.
Fed Rate Cut Hopes
The Consumer Price Index (CPI) of the United States increased 0.2% sequentially and 2.7% year over year, according to the Bureau of Labor Statistics (BLS). This compares with the Dow Jones forecast of 0.2% monthly and 2.8% annual growth, as quoted on CNBC.
Excluding volatile food and energy prices, core CPI rose 0.3% in July and 3.1% annually, in line with monthly expectations but slightly above the 3% yearly forecast. Following the bullish inflation print, Polymarket now places the probability of a 25 bps Fed rate cut on Sept. 17 at 81%. If the Fed cuts rates ahead, global stocks, including the Nikkei, are likely to rise.
U.S.-China Trade Truce Boosts Asia Stock Rally
There was a trade deal between the United States and Japan last month, which cut auto tariffs from 25% to 15%. The deal ushered in a fresh rally in global equities, especially in the auto sector.
President Trump also signed an executive order on Aug. 11 that extended his trade truce with China for another three months until Nov. 10, pausing the triple-digit import duties that the two countries would have levied on each other’s goods.
The United States and China will pause 24% tariffs on each other’s goods for another 90 days and retain a 10% levy. This pause in the trade truce is another tailwind for Japan stocks and ETFs.
Japan-Focused ETFs to Benefit From Rally
The rally in Japanese equities will likely boost demand for Japan-focused exchange-traded funds (ETFs).iShares MSCI Japan ETF EWJ, WisdomTree Japan Hedged Equity Fund DXJ and iShares JPX-Nikkei 400 ETF JPXN are some of the ETFs that should gain ahead.
Good Times Ahead for Japanese Small-Cap Stocks?
Invesco CurrencyShares Japanese Yen Trust FXY has added 6.7% year to date. A strengthening yen may benefit domestically focused Japanese stocks. iShares MSCI Japan Small Cap ETF SCJ and WisdomTree Japan SmallCap Dividend Fund DFJ should benefit from this situation.
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SPDR S&P 500 ETF (SPY): ETF Research Reports Invesco CurrencyShares Japanese Yen Trust (FXY): ETF Research Reports iShares MSCI Japan ETF (EWJ): ETF Research Reports WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports iShares JPX-Nikkei 400 ETF (JPXN): ETF Research Reports iShares MSCI Japan Small-Cap ETF (SCJ): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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