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Earlier this year, tragedy struck Japan in the form of a 9.0 earthquake, one of the largest ever recorded. The rupture set off tsunamis that wreaked havoc all across the nation and displaced hundreds of thousands from their communities and homes. Once the initial damage had been done, the news only became progressively worse as fears of major radiation leaks hit the nation thanks to flooding at one of the country’s many nuclear plants. Now, Japan is in a stage of rebuilding and attempting to nurture its shattered economy.With numerous major business pulling their resources out of a country now deemed to be too unsafe, the Japanese markets will be heavily affected by government regulations and policies that come in these months ahead.

Today, the Bank of Japan will be releasing its interest rate decision, which could have a significant impact on the overall economy. For years now, Japan has been diligently fighting deflation that has put major pressure on their economy, but now the BOJ has claimed that simply fighting deflation will not be enough. The economy is in a fragile state, and BOJ Governor Masaaki Shirakawa addressed deflationary issues, but also went on to say “that any price rises needed to be driven by solid economic growth, emphasizing the need for policies to boost Japan’s potential growth” [see also Nuclear ETF Meltdown: Four Funds Rocked By The Japanese Quake] .

According to Reuters, Japan, the world’s third largest economy, is set to report “three straight quarters of contraction at the end of June, sliding back into recession” writes Leika Kihara, including an annualized 3.7% drop in the most recent quarter. But the BOJ did its best to distinguish the difference between this recession, and the previous one caused by the global financial crisis. The financial crisis which started in 2008 was due to a lack of demand, but this most recent recession is now an issue of confidence and supply, thanks to the massive amounts of factories and warehouses that were destroyed by the quake and subsequent tsunamis [see also Seven Best ETF Performers Of Q1 (And Five Of The Worst)].

With this important announcement on tap for the day, the iShares MSCI Japan Small Cap Fund (NYSEARCA:SCJ). This fund replicates a benchmark that includes 40% of the eligible small cap universe within each industry group in the MSCI Japan Index. Despite its solid yield of nearly 2%, this fund along with most Japanese equities has struggled in 2011, losing 4.4%. Depending on what policies and interest rate the BOJ decides, this fund will likely react swiftly, making it a good fund for investors to keep their eyes on as the week comes to a close.

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Source: Friday's ETF to Watch: iShares MSCI Japan Small Cap